China: a long-term opportunity that requires vision, patience and local partnerships

As China’s economy continues to grow, it’s strategic importance to investors continues to rise.

China’s economy is posting strong growth in 2021, projected to reach 8.5% this year1 and putting the country on track to meet its growth target of ‘over 6%’. The country is attracting a new wave of capital flows, especially considering long-term investment opportunities. Simon Kellaway of Standard Chartered explains how international investors can tap into the China opportunity.

China’s strategic importance to investors continues to rise. In the China Investor Survey 2020 (published by Funds Europe in partnership with Standard Chartered) over three-quarters of respondents said that the importance of China to their global investment strategies had increased over the past year, while just 1% said China’s importance had declined.

An even-larger proportion—nine out of ten—said that the importance of the nation continued to rise in their overall investment priorities.

Simon Kellaway, Standard Chartered’s regional head for Financing and Securities Services in Greater China and North-East Asia, is based in Hong Kong and has seen the economy bounce back sharply after the pandemic travails of the past year.

“China was one of the first markets to escape the clutches of the pandemic and that’s helped to attract increasing capital flows,” he says.

But there is so much more to this than Covid. For example, he cites the decision by FTSE Russell to include Chinese government bonds in the FTSE World Government Bond Index. “This has helped to capture increased investment from investors across the Asia region in addition to the traditional capital flows from Europe and America. Institutional investors from Japan, Taiwan, and Korea have all increased their allocation to Chinese financial markets,” says Kellaway.

Initially, international investors have been attracted predominantly by China’s differentiated yields, both in terms of relative fixed income and equity performance, but the broader, long-term investment opportunities within the country are also hard to ignore.

Whilst presenting compelling investment opportunities, China is not without its challenges. It’s complex rules and regulations regarding both inbound and outbound capital flows are designed to enable the slow opening up of its financial markets in a carefully controlled manner. However, the speed of change over the past year has increased significantly, partially due to the demands of the global pandemic and partially due to the broader Chinese macro-economic environment. International investors need to stay close to regulatory changes and be ready to act quickly, even if the outcomes of their decisions will not be felt for some time.

In the China Investor Survey 2020, respondents were asked whether the economic and political environment was a primary influence on their investment decisions. Surprisingly, only a little under two-thirds (65%) said it was. Kellaway was slightly taken aback by this result. “I would have thought that would have been a lot higher because immediate investment opportunities are primarily about relative yields, transparency, policy, and fundamentally how Western investors can engage and operate in a symbiotic fashion with the Chinese financial markets.”

Standard Chartered in China

Standard Chartered is well positioned to take advantage of this, having had a presence in China for over 160 years.

The bank has a three-pillar approach to its financing and securities services business within China.

  1. Firstly, for non-Chinese investors there is an “inbound strategy” that connects clients with Chinese investment opportunities through the recently revised and updated Qualified Foreign Investor (QFI) programme and the China Interbank Bond Market access programme (CIBM) that provides for direct access to onshore Chinese financial markets
  1. Coupled with this inbound strategy, there is an “outbound strategy” which support Chinese entities as they seek to invest overseas via Qualified Domestic Institutional Investor (QDII) and Qualified Domestic Limited Partnership (QDLP) schemes. Through its international custody hub in Hong Kong, Standard Chartered is able to provide Chinese investors access to over 100 international financial markets, helping them to diversify their investment portfolios
  1. The third pillar of Standard Chartered’s strategy is its focus on local domestic funds, whereby the bank provides custody services to both private and public funds aimed at Chinese investors. Kellaway adds that “In 2018, we were the first foreign bank to secure a domestic custody licence, and since then, we have experienced an increasing growth in demand for our services. In 2020, for example, we saw an increase of 41% in the number of deals that we supported. This year, we have launched the first private fund custody deal for a wholly foreign-owned enterprise (WFOE) and successfully closed a mutual fund custody deal – a first for a foreign bank in China.”

As Kellaway notes: “The three components of our strategy are now starting to become interwoven which dovetails generally with how the Chinese market is viewed by international and local investors.”

Kellaway argues that Standard Chartered is an attractive proposition for international investors considering a move into the Chinese financial markets. “We really feel that we are trusted advisers across all of the China access schemes, and that we have broad coverage, not only through our securities services team but also for execution activity through our trading and market teams. So, when clients are considering the various access routes, including the Hong Kong based stock and bond connect programmes, we can help to recommend various options depending upon their underlying investors and overall goals.”

Additionally, the company is able to help advise on local fund matters. Says Kellaway: “We can also assist international investors who want to understand the local funds marketplace more with a view to setting up their own China-domiciled funds. We do this in many Asian markets but have specifically witnessed an increasing interest in China over the past year.”

Guidance and counsel

In order to ensure that it keeps up to date with the rapid pace of regulatory change, Standard Chartered enjoys significant interaction with all of the relevant local Chinese regulators, says Kellaway. “We talk to them to help them understand what our international investors are looking for and expecting with regards to ease of access and associated reporting. That’s not to say that we’re making the rules; as we’re certainly not since the regulators appropriately have their own independent views. But, at the same time, they do seek our guidance and counsel on international investor thinking.”

As interest in China continues to heat up following the global pandemic, regulatory change and associated market developments there is an increasing number of international firms looking to understand how best to monetise the China phenomenon. To these companies, Kellaway sounds a note of caution. “This is a marathon,” he says, “and not a sprint. Your aspirations in China should be long-term: don’t expect to achieve your goals in the short-term, but rather be prepared for a much longer pay-off cycle.”

He concludes: “You should be very clear about your long-term strategy, you should invest carefully and choose local partners wisely, and you should consider both your inbound and local strategies together. From there, you can then work with a partner or group of partners that can help you across the broader spectrum of opportunities. I would encourage anyone considering China to think more about the value that they can bring rather than what they can derive in the short-term.”

1 https://www.worldbank.org/en/country/china/publication/china-economic-update-june-2021

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