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International investors target China for economic performance and yield

Asian_runnersChina is central to the long-term strategy of international investors, despite geopolitical obstacles generated by Covid-19 and US-China trade tensions during the latter days of the Trump administration.

This finding is suggested by Funds Europe’s ‘China investor survey 2020’, 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.

Buoyed by China’s investment in digital infrastructure and early exit from lockdown restrictions, the Shanghai Composite has risen over 21% year-on-year (at January 26, 2021) and this compares favourably with 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. “The survey demonstrates that investors are excited by new investment opportunities in China, including those in private markets,” says Simon Kellaway, Head of Greater China Securities Services at Standard Chartered.

“China will continue to push forward with its market-oriented opening up,” says Kellaway. “With this, and with the differences in economic performance and bond yield between the East and West, investment flows into China are expected to accelerate over the coming 12 months.”

China attracted $163 billion in FDI inflows during 2020, thereby overtaking the US as the world’s most important FDI destination, according to UNCTAD data.

In contrast, US FDI inflows contracted from $251 billion in 2019 to $134 billion for 2020.

This inbound FDI is driven by a positive growth outlook for the Chinese economy. China expanded by 2.3% during 2020, according to data from the National Bureau of Statistics of China and is likely to be the only major economy to record GDP growth over the 12 months against the backdrop of Covid-19.

According to OECD projections, China will deliver 8% GDP growth during 2021, followed by 4.9% during 2022– respectively the fastest and second-fastest growth rates in the G20 for these periods (G20 Economic Outlook, Dec 2020).

Encouraged by reform of cross-border investment channels and steps to increase self-reliance in strategic sectors, China’s 4% rise in inbound investment during 2020 represents a striking divergence from the global trend. Global FDI flows plummeted 42% to $859 billion, 30% below the levels witnessed during the 2009 global financial crisis (UNCTAD Investment Trends Monitor, January 24, 2021).

Examining the impact that this positive investor sentiment will have on fund flows, 47% of respondents to the Funds Europe survey 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 financial authorities have streamlined the QFII and RQFII programmes, removing the need to apply for investment quota (since June 6, 2020) and bringing these together under a single investment framework, known as Qualified Foreign Investors (QFI), from November 1, 2020. Although the quota requirement has been removed, foreign investors must still obtain registration from the central bank and the foreign exchange regulator.

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.

Read the full report now »

© 2020 funds europe