Chinese assets still attractive for global investors

A recent Invesco survey found that global asset management investment sentiment regarding exposure to Chinese financial assets has largely held stable, with most expecting to further expand their China exposure in the coming 12 months.

Up to 86 percent of the respondents said their China exposure has either grown or remained steady over the past 12 months, with 64 percent expecting further increases in the coming 12 months, according to a survey of global investors’ China exposure, commissioned by Invesco and carried out by Economist Impact.

China’s growing economic strength, its shift from heavy reliance on exports to a domestic demand-driven economic model, the growing number of innovative companies and its rapidly developing financial markets — all combine to make the country an attractive investment opportunity, according to the survey respondents.

China is the second-largest asset management market in the world measured by assets under management or AUM, and the Chinese government is being thoughtful and has made good progress in developing its financial markets. This commitment to opening its markets has helped support the tremendous growth and transformation of China’s economy, rewarding investors around the world.

Given the ongoing interest in renminbidenominated assets, Invesco launched the study: China Position 2021: Sustaining Institutional Interest, together with Economist Impact, which surveyed 200 asset management firms from across the globe on their investment stance toward China.

China was the only major economy to show positive GDP growth in 2020 through the COVID-19 pandemic. Despite ongoing geopolitical tensions and recent regulatory moves in China, the macroeconomic outlook remains healthy as the country finetunes its industrial policies to balance growth with sustainability. We see that global investors recognize the need and benefit of a long-term China allocation as the underlying economy continues to evolve and transform.

We have seen a majority (60 percent) of respondents have better expectations of economic conditions in China relative to conditions globally over the next 12 months.

While COVID-19 has greatly impacted economic behavior and financial markets, it does not seem to have changed investors’ strategic view of investing in China or where the opportunities are. Over half of survey respondents (54 percent) believe the pandemic and its global impact have increased their risk appetite toward their China exposure.

The study showed that geopolitical uncertainty from China-US trade tensions lingers this year, yet 80 percent of survey respondents said this ongoing dynamic has had a moderate or significant influence on them to increase China exposure levels. This contrasts with the results of the same survey conducted in 2019 when 44 percent of participants said it will have a negative impact on their investment decisions.

When it comes to asset class selections, China onshore equities are still the most popular asset class for most respondents (52 percent), followed by onshore fixed income (51 percent) and offshore equities including Hong Kong-listed shares and US-listed Chinese equities (50 percent).

We also found that, while recent regulatory reforms in China have driven volatility in the technology sector, global investors continue to see China technology as a key allocation interest.

Technology innovation (49 percent) and financial services (44 percent) remain the top investment themes for survey respondents, with healthcare (27 percent) and domestic consumption (26 percent) also capturing interest.

Within the theme of technology, asset owners are looking at opportunities from artificial intelligence or related digital automation (39 percent), 5G (32 percent) and online services for consumers or businesses (31 percent).

It is noteworthy that investors are increasingly carving China out from the emerging markets segment. Over half (54 percent) of survey respondents stated they have direct investments in China with a dedicated portfolio, compared to 40 percent in broader investments such as emerging market or Asia-focused vehicles.

Improving overall portfolio efficiency (48 percent), exposure to opportunities in specific sectors (46 percent) and participating in China’s long-term economic growth story (45 percent) are cited as the key investment objectives of having dedicated China exposure.

In addition, from the survey, we observed that the majority of survey respondents (62 percent) always or often adopt ESG investing — taking environmental, social and governance criteria as key standards to screen potential investments — within their China exposure, and two-thirds said their China exposure has increased significantly/somewhat due to their ESG goals.

While they are still in their early days, China’s ESG disclosures and reporting standards have been improving at a fast pace over the last five years, driven by an increased awareness of ESG issues among companies and investors alike.

The country also exhibits a significant determination to play a meaningful role in climate change mitigation going forward, such as moving toward carbon neutrality. We believe the nation’s ESG and climate ambitions will bring far-reaching transformational consequences to the China investment landscape and shape the way Chinese companies operate.

Although the long-term return potential is promising, investing in China is not without its challenges.

Continued tension between the US and China will remain a nuisance for investors in the foreseeable future. And, as we learned from the survey, concerns remain about lack of trust and transparency in corporate reporting, regulation, financial intermediaries and financial systems.

Regulatory moves this summer aimed at regulating business behavior or models of large consumer internet and education companies sent shares of these businesses tumbling.

However, these regulatory actions intended to promote long-term sustainable growth and social welfare may level the playing field for small and innovative companies and spur innovation.

We are excited about the tremendous potential of China, and believe it offers a great investment opportunity. We believe that China is already one of the most sophisticated digital economies globally and the country has by no means abandoned its ambitions to further advance in this segment.

We foresee that the recent increase in regulatory scrutiny will promote healthy competition and support more sustainable competition within the internet sector, which should set China on its path to meet one of the key targets outlined in its 14th Five-Year Plan (2021-25) — to transform into an innovation powerhouse.

As China’s clout grows further in the global economy, long-term investors are likely to reap the full benefits with an appropriate exposure to China assets linked to new economy themes.

CAI MENG / CHINA DAILY