Funds Europe survey shows demand for China

Chinese equitiesInvestment flows into China will strengthen over the next 12 months, despite uncertainties linked to US-China trade tensions and the new Hong Kong security law.

The finding is suggested by a Funds Europe’s ‘2020 China Investor survey’, conducted in partnership with Standard Chartered.

More than 90% of respondents said that the importance of China in their investment strategies continues to rise, with 17% of these saying that China holds top priority in their investment planning.

Challenged globally by weak dividend forecasts and fears of recession, investors are turning to China in their drive for yield. The Shanghai Composite has risen over 10% year to date (at October 30) and this compares well with the performance of many equity markets around the world.  

“For fixed income investors, China’s bond markets offer attractive yields relative to their equivalents in other large global economies,” says Simon Kellaway, head of Greater China securities services at Standard Chartered. “The survey also demonstrates that investors are excited by new investment opportunities in China, particularly those in private markets.”  

Examining the impact that this positive investor sentiment will have on fund flows, 47% of respondents said that their institution will increase their investment to China during the 12 months ahead and a further 12% said they will invest in China for the first time. In contrast, only 6% indicated they will reduce their investment allocations to China over this period. 

The survey finds that it is becoming easier for foreign investors to access the Chinese market, both through onshore and offshore channels. 69% highlight ease of access to onshore channels, and 63% highlight ease of access of offshore channels - such as the Stock Connect and Bond Connect programmes - as primary factors shaping their investment strategies in the Chinese market.

For onshore investment, China’s regulators have taken steps to streamline the QFII and RQFII programmes and to broaden access to China’s domestic bond markets through CIBM Direct. Previously, QFII and RQFII regulations required foreign investors to apply for investment quota prior to converting from international currency into local currency (CNY). This quota requirement has now been removed, effective from June 6, 2020, although foreign investors must still obtain registration from the central bank and the foreign exchange regulator.

However, Stock Connect and Bond Connect remain the access channels of choice for many international asset managers and institutional investors who previously found it challenging to execute their investment ambitions in China through the QFII or RQFII schemes.

With the partial inclusion of China A-shares in the MSCI Emerging Markets Equities Index from May 2018, this has driven a surge of investment into China through Stock Connect, the equities trading link between China’s mainland markets and the Hong Kong Stock Exchange.

Index inclusion has also encouraged northbound investment flows into local currency government bonds and policy bank bonds via Bond Connect, following the phased introduction of these bond securities in the Bloomberg Barclays Global Aggregate and the JPMorgan Emerging Market Bond indices which began in 2019.

On September 24, FTSE Russell announced the inclusion of Chinese government bonds in the FTSE World Government Bond Index, which is scheduled for October 2021 subject to the completion of a number of reforms (including changes to the account opening process, changes to the settlement regime to allow settlement beyond T+3).

Notwithstanding the impact of the global pandemic on cross-border investment, Bond Connect and Stock Connect Northbound average daily turnover reached record half-yearly highs of 19.9 billion renminbi (US$3billion) and 74.3 billion renminbi, respectively, in the first half of 2020. The Bond Connect average daily turnover was triple that of H1 2019.

Alongside ease of access to the market, respondents also pointed to US-China trade tensions (50%), regulatory clarity (31%) and the need for transparent financial reporting and accounting standards (22%) as primary factors that are shaping their decisions when, and how much, to invest into China.

© 2020 funds europe