Investment flows into China will accelerate over the coming 12 months, despite concerns about a slowing global economy and the impact of US-trade tensions, according to early findings of a Funds Europe survey being conducted in partnership with Standard Chartered.

In preliminary results from this 2020 China Investor Sentiment Survey which is still open for responses,­ 47% of respondents said that their institution (or their investor clients) will increase their investment to China. A further 11% said they will invest in China for the first time, with only 6% indicating they will reduce their investment allocations to China over the coming year.

Simon Kellaway, Head of Greater China Securities Services at Standard Chartered, said: “These results highlight a positive outlook for China that aligns with what are seeing on the ground. Despite the headwinds created by the covid-19 pandemic and global economic slowdown, the survey predicts growth in domestic and cross-border investment that exceeds our internal predictions.”

Driving this optimism is a belief that China will play a key role in leading the global economy out of its covid-induced slowdown. The Chinese economy grew by 3.2% y-o-y in Q2, according to Trading Economics, making it the first major economy to report growth after easing its lockdown restrictions.

Confronted globally by low interest rates, weak dividend forecasts and fears of recession, investors are turning to China in their search for yield. “For fixed income investors, China’s bond markets offer attractive yields relative to their equivalents in other large global economies,” says Kellaway. “Chinese equities have on average risen more than 6.8% ytd, which compares well with many equity markets around the world. The survey also demonstrates that investors are excited by new investment opportunities in China, particularly those in private markets.”

Survey responses so far indicate that it is becoming easier for foreign investors to access the Chinese market, both through onshore and offshore channels. China’s regulators have taken steps to streamline the QFII and RQFII programmes (removing the ‘quota’ requirement, expediting the registration process) and to broaden access to China’s domestic bond markets through CIBM Direct.

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

With the part 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.

“As China’s trade surplus gradually narrows and the vertiginous rates of growth delivered by some Chinese companies revert to more moderate levels, the opportunities for asset managers that are skilled at stock picking will become increasingly important,” says Kellaway. This point is confirmed by the survey results, where 41% of respondents say that actively-managed fund products will be central to their investment strategies in China.

While the survey predicts a positive outlook for China-bound investment, it finds that respondents are monitoring economic and political developments very closely, both within the Greater China region and globally, to identify potential risks and opportunities these may present for their investment strategies (52%).

Respondents also highlight US-China trade tensions (43%), regulatory uncertainty (25%) and the need for transparent financial reporting and accounting standards (19%) as being primary factors that are shaping their decisions to invest in China.

For asset managers wishing to establish a local presence in China, Kellaway says this must be viewed as a medium-to-long-term play. “The task of building a local entity, creating the right product set and developing strong distribution relationships with local partners requires detailed planning and due diligence. This is not an environment for foreign entities simply looking for a fast pay cheque.”

“With strong opportunities that China offers for yield generation, and with steps that the Chinese authorities are making to liberalise access to the market, we will see stronger interest in investing in China over the coming 24 months, both through establishing a fund management presence on the ground and through investing from offshore locations,” concludes Kellaway.

This article is based on preliminary results from the Funds Europe 2020 China Investor Sentiment Survey, in partnership with Standard Chartered.

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