Trade flows

China is a top three investment destination

China remains a popular choice for global institutional investors, despite short-term market sentiment and regulatory uncertainty, our survey finds

China remains a top three investment destination for almost half (49 per cent) of global institutional investors, despite worries about market conditions.

China is a top three investment destination - chart
These are the findings from our survey of financial market participants, complemented by in-depth interviews among investors in Hong Kong, Singapore and Taiwan, into attitudes to the evolving China investment landscape.

Demand for exposure to China is high, with 67 per cent of respondents expecting to increase their investment in the year ahead, and no one planning to reduce positions.

Investment channels of the future

Newer access routes into China are seen as investment channels of the future. For equities, the landmark scheme connecting Shanghai and Hong Kong stock markets – the Shanghai-Hong Kong stock connect – is being used by 51 per cent of respondents and an additional 18 per cent suggested they will begin to use it in the year ahead, no doubt in anticipation of the much-awaited scheme connecting Shenzhen and Hong Kong stock markets, which will increase the value of the stock connect overall as it will finally offer access to all Chinese stocks.

When it comes to fixed income, one in three respondents is looking at the China interbank bond market as the investment channel of choice.

However, regulatory uncertainty remains a concern for investors, with 98 per cent of respondents saying ‘clarity of rules’ is the most important factor or key consideration in evaluating access channels, ahead of cost, eligibility or time to market considerations.

China is a top three investment destination - chart

The appeal of newer access channels might lead some to think that older ones, such as the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, have run their course. But this does not seem to be the case.

62 per cent of investors still use QFII, with 36 per cent expecting to add to their quotas this year, and 31 per cent use RQFII, with 40 per cent looking to increase their usage in 2016.

Joint ventures could become less popular

However, some access channels could become less popular. Onshore joint-ventures (JVs) – once viewed as essential for access – have split opinion. 38 per cent of respondents felt that joint ventures are important or essential, while 30 per cent say the JV structure will lose its relevance, and 5 per cent say it is unnecessary.

With new channels – such as Hong Kong and China’s Mutual Recognition of Funds programme and China’s Qualified Domestic Limited Partnership (QDLP) programme – now facilitating much greater cross-border access, the unique role of JVs is certain to come under increased scrutiny over time. If global and Chinese managers now have the means to go it alone, why wouldn’t they?

Many China access discussions these days centre on the potential inclusion of China A-shares in the MSCI global indices. Sentiment appears split on when that may happen though, with 44 per cent of investors expecting inclusion in 2017 and 37 per cent in 2018.

Appetite for Chinese investments clearly remains undiminished. It is only the speed of adoption that remains in question

Either way, the short-term impact of portfolio rebalancing around an MSCI-inclusion is getting more and more attention. How will investors (especially those of passively managed funds) manage the transition in a timely way? And how will the market react to a short-term spike in demand for China’s offshore renminbi (CNH) market?

Appetite for Chinese investments clearly remains undiminished. Investors, intermediaries and regulators are engaging ever more effectively in the face of a growing portfolio of China access routes. It is only the speed of adoption that remains in question.

Find out more about how investors view China, as well the most popular access channels, in this report.