Economic trends

Investors are more optimistic on China

Majority of investors plan to increase their investment in China in the next year, our survey reveals

From insurers to investment managers, investors are increasingly optimistic about China, driven by more settled market conditions, diminished concerns about capital controls, regulatory clarity and a stabilised renminbi (RMB).

In our survey of 900 global investors, as many as 60 per cent said China is one of their top three investment priorities, up from 49 per cent a year ago. Meanwhile, 69 per cent of investors plan to increase their exposures over the next 12 months. The figure is even higher among fixed-income investors, with three quarters planning to increase investments in the next year, especially as gaining access to China becomes easier.

The recent launch of the long-awaited ‘Bond Connect’ scheme, which links China’s bond market with overseas investors, means it’s never been easier to tap into the world’s third-largest bond market, and the development is already proving popular.

As access to China’s capital markets becomes easier, investment flows are set to improve further

More than a quarter (27 per cent) of investors in our survey said they were likely to use Bond Connect in the next 12 to 24 months. This, coupled with the news that China A shares will be included in the MSCI emerging markets index at the beginning of 2018, is significant.

The MSCI inclusion alone is set to bring around an extra USD16 billion of flows into China next year and general flows into China’s capital markets are expected to increase by RMB100 billion in the second half of 2017, reaching RMB950 billion by year-end.

Better access, better flows

As access to China’s capital markets becomes easier, investment flows are set to improve further. But investing in the world’s second-largest economy is not a science, rather an art, with a wide-range of channels available to international institutions.

Our survey reveals that investors favour equities over bonds, with 40.4 per cent of respondents using the Shanghai-Hong Kong stock connect for their China investments. By comparison, foreign exposure to Chinese fixed income is low – just 12.3 per cent of investors are looking at China’s interbank bond market (CIBM) as the investment channel of choice, but this is expected to change with the introduction of Bond Connect.

The scheme, which will provide international investors with quicker and easier access to China’s bonds directly from Hong Kong, removing the need to open custody and bank accounts in China, is likely to attract interest from investors who are new or are exploring investing in the world’s second-largest economy.

Reforms are going to make the next year interesting and exciting for both the development of China’s capital markets and the internationalisation of the RMB

However, the emergence of new channels begs the question as to what will happen to the traditional China access routes such as Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII). While both schemes remain popular, just 1.9 per cent of respondents say they will continue using QFII.

As the pool of foreign investors in China grows, it’s likely these newer allocators will increasingly pivot towards the stock connect and CIBM at the expense of QFII and RQFII.

A big year ahead

Of course, the latest developments – MSCI inclusion and the Bond Connect launch – are not the end of the road for China’s capital markets. Structural and operational reform is still required.

Given the continuing growth in the number and complexity of schemes, it’s perhaps not surprising that investors in our survey want simpler access to China. This could take many forms – including merging QFII and RQFII rules entirely, or allowing for investments across multiple channels to become fungible – but the problem is that there is little evidence so far to suggest this a focus for China this year and next

Despite this, the latest reforms are going to make the next year interesting and exciting for both the development of China’s capital markets and the internationalisation of the RMB. For global investors, China is increasingly attractive, and gaining access has never been easier.

For more on how investors view China, read our survey findings.