What are the investment opportunities in China as economic growth returns to pre-crisis levels?
As the Chinese economy returns to growth after the impact of Coronavirus, CAMRADATA’s latest whitepaper on investing in China explores the current economic situation and opportunities for foreign investors as quotas are removed for Chinese equities.
The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in March, including representatives from China-based Eastspring Investments, Mackenzie Investments, T. Rowe Price, Aon, Bfinance, Cambridge Associates, Cartwright and Willis Towers Watson.
The report highlights that China’s GDP expanded by 6.5% in Q4 2020, making it the only major economy to have grown. This was partly due to rigid measures to prevent the transmission of the virus, as well as increased industrial production and higher retail sales.
Sean Thompson, Managing Director, CAMRADATA said, “If the Chinese economy shows sustained improvement, the authorities will have some leeway to ease the extraordinary stimulus measures taken to fight the impact of Covid-19. However, China will also need to manage high volatility until the virus is largely overcome and show increasing signs of progress to meet its target of net zero emissions by 2060.
“On the investment front, China offers continued growth and diversification to foreign investors, combined with greater access to equities by removing both the Qualified Foreign Institutional Investor (QFII) and Renminbi (RQFII) quotas in November 2020.”
The roundtable considered foreign investors’ appetite for buying into local enterprise. Panellists from investment consultancies discussed their preferred allocation to China as a percentage of global equities.
They also looked at how best to access Chinese companies via public markets, given that the Stock Connect programmes have made A-shares, i.e. those listed on the mainland, more available to foreigners.
The asset managers on the panel also shared thoughts on China as an Emerging Market, before the session ended with a discussion on ESG issues, which most felt were progressing in China, but still had a long way to go.
Key takeaway points were:
- UK pension schemes in general are under-allocated in China, with one panellist suggesting around 15% is recommended.
- The first issue when accessing Chinese companies is whether A-shares do act differently to H-shares, those listed in Hong Kong, or even those accessible in New York. The second issue is whether asset managers create “China All Shares” strategies, including A and H-shares and US ADRs; and/or carve out China from the Emerging Markets universe, where it already has a substantial weighting.
- An estimate by one panellist is there were 60-70 institutional-quality strategies just in A-shares; 60-70 managers benchmarking themselves against MSCI China, which is about 11% A Shares, 56% H Shares and 33% US ADRs; and only about 20 “China All Shares” strategies – most of which do not even have a three-year track record.
- Another panellist said they wanted to see more managers with “boots on the ground” in the major Chinese cities. They said some investment managers have been slow to build their presence in China, making it harder to identify opportunities to invest in Chinese companies.
- The panel considered if A-shares are overvalued. One panellist said that before foreign investors arrived, financial markets in Shanghai and Shenzhen were related to the economic cycle, central government policy and liquidity, creating huge swings in valuations; overshoots and undershoots and a lot more volatility.
- It was suggested that the attraction of China was that it still has inefficiencies, which offer opportunities for institutional investors to generate alpha.
- Discussing Chinese consumerism, one panellist claimed that Chinese customers are the least loyal in the world. Generationally, the Chinese have pivoted away from international luxury brands, and now look to their native culture more.
- The discussion on ESG saw concerns about local metrics because some of the criteria used by global ratings agencies such as MSCI needed to be customised to the Chinese market. In essence, the question here was how managers are incorporating ESG for Chinese companies.
- There were also concerns that some clients have become more cautious in increasing exposure to China, although there has been less reticence among those just starting to build up an allocation. Caution was a direct response to worsening US-China relations.
- But fears about capital controls and the risk of the State seizing assets have receded, in part because of the ongoing opening of the market.
- In Emerging Markets in general there are more family-owned and State-Owned enterprises as well as less comfort in the rule of law. It was noted that as China’s shareholder base widened, it would be reasonable to expect companies to pay greater attention to foreign minority shareholders and their requirements. But ESG ratings providers had a Developed Markets’ mindset which expected full transparency.
- One panellist said their team employs its own ratings in assessing ESG. Companies with better ESG tend to make better returns over the long run, adding that not only were earnings better but valuations too, meaning that the market recognised ESG improvements. Even the retail market was beginning to factor in ESG.
The whitepaper also features three articles from the sponsors offering valuable additional insight. These are:
- Eastspring Investments: ‘Staying ahead in China’s fast-moving market’
- Mackenzie Investments: ‘China’s pivot to sustainability’
- T. Rowe Price: ‘China’s Economy: Recovery and Rebalancing’
To download the ‘China’ whitepaper click here