Why global investors shouldn’t ignore China’s capital markets

Economy June 06, 2018 01:00


ASIA’S LARGEST producer of giant windmills. The creator of Africa’s favourite cell-phones. And the world’s most valuable artificial intelligence start-up.

These are just some examples of the kind of firms that have popped up in China in recent years – the product of a gradual but epochal economic rebalancing that has seen low-tech, heavy-duty manufacturing increasingly superseded by high-tech innovation and domestic consumption.

So far, this story has been largely beyond the reach of most foreign investors. 

But this is starting to change, and in a big way.

The opening-up of mainland China’s capital markets – begun cautiously some 16 years ago – has sped up markedly in recent years, most prominently with a pair of “stock connects” linking onshore bourses in Shanghai and Shenzhen with the international finance hub in Hong Kong. 

The China Interbank Bond Market (CIBM) Direct scheme was introduced in 2016, followed by a “bond connect” with Hong Kong last July. 

And a new stock connect could link mainland China with London as soon as the end of this year.

Another major milestone came on 1 June, when MSCI, the influential index provider, included more than 200 large-cap mainland-China-listed stocks in its closely-watched Emerging Markets Index. 

What may sound like an abstract technical development is in fact hugely significant: the inclusion shows China is becoming accepted into the fabric of the global capital markets. It could also prompt well over half a trillion US dollars in foreign investments to pour into Chinese stocks in the next five to 10 years as institutional investors adjust index-linked portfolios to MSCI’s change.

Clearly, investors – be they European hedge funds, sovereign wealth funds from Asia, or ordinary savers around the world – will need to be looking at what might be a once-in-a-generation opportunity in Chinese capital markets. Their sheer size alone makes them compelling: China’s equity market is the world’s second-biggest. Its domestic bond market is the third-largest in the world.

What’s more, China’s economy is now fundamentally different from 20 or 30 years ago, so the composition of what’s investible has also become much more diverse. 

Nimble and often innovative private companies are increasingly eclipsing giant state-owned enterprises.

On the high-tech and innovation front, government policies such as “Made in China 2025” have led to spectacular growth in e-commerce, advanced manufacturing, and electric vehicles. 

On the consumption front, rising incomes have created investment opportunities in everything from sportswear, to travel services, to fiery baijiu liquor. 

And efforts to promote growth that’s not just higher-value but also good for the environment are set to foster green champions. 

To be sure, investing in China can sometimes feel like it’s not for the faint-hearted: witness the gyrations of A-shares in 2015. 

MSCI for one has warned against prolonged trading suspensions of A-shares, and also wants to assign ratings on environmental, social and governance for mainland-listed stock on its index. The same call has gone out for Chinese bonds. Such changes will take a bit of time. But longer-term, developments that encourage further opening up - such as the MSCI index inclusion - will both strengthen China’s capital markets and help finance its economic transformation.

All this is why we can expect further liberalisation in the months and years to come: For Beijing, financial reforms, the opening-up of its capital market, and the growing international use of the renminbi that will come with that – all these are part and parcel of the wider economic rebalancing it wants to achieve. 

The direction is clear, and the pace is picking up. For investors around the world, the biggest mistake would be to ignore China’s markets and their enormous potential now.

Contributed by DAVID LIAO, President and CEO, HSBC China