After suffering from a brief but violent COVID-19 induced economic contraction at the start of 2020, China’s GDP (gross domestic product) is once again rebounding, increasing by 18.3 per cent in Q1 2021, the highest quarterly year-on-year (YOY) growth rate since records began in 1993.1 As a result, investor interest in China is on the rise. These investor inflows into China are also being fuelled by the sheer scale and diversity of the local market; positive market liberalisation measures; and index inclusions.
Strong headwinds accelerate investor flows
As an investment destination, China boasts some excellent fundamentals. Ricky Li, Head of FICC Sales, Markets and Securities Services at HSBC Bank (China) highlighted that China is enjoying strong growth spurred on by its rapidly expanding middle class. In terms of returns, China is very attractive for yield-starved foreign investors. “For example, a 10-year Chinese government bond is yielding 3.1 per cent in contrast to a 10-year US Treasury bond, which is yielding around 1.5 per cent,” commented Li. In addition to being incredibly diverse, Li pointed out the Chinese market was largely uncorrelated to global capital markets and had proven extraordinarily resilient to the pandemic. Together with these positive macro drivers, the country’s equity and bond markets have also been incorporated into a number of global indices – which in turn is leading to heightened investor flows. According to PBOC (People’s Bank of China), overseas holdings of RMB denominated assets increased by 40 per cent YOY in 2020 to reach RMB 8.98 trillion (as of December).2 Meanwhile, foreign holdings of Chinese bonds reached RMB 3.68 trillion in May 2021 - corresponding to a 52 per cent YOY growth.
Market reforms are pivotal to attracting inward investment
One of the main reasons behind China’s index inclusions and the subsequent investor inflows has been the country’s steadfast commitment to implementing market reforms. This enthusiasm for market liberalisation shows no sign of waning. Sophia Chung, Managing Director, Head of Securities Services China at HSBC Bank (China), said regulators had eased requirements for foreign institutions looking to access the country’s equity market by scrapping the QFII (Qualified Foreign Institutional Investor) and RQFII (Renminbi Qualified Foreign Institutional Investor) investment quota restrictions. “The rules have significantly widened the investment scope for QFII and RQFII to include instruments such as bond repos, commodity futures, margin financing, and securities lending,” said Chung. The QFII/RQFII entry and authorisation process has been rationalised too, in what is helping expedite approvals for foreign institutional investors. Since the rule-changes were enacted, Chung noted there has been a significant spike in investor application requests to the China Securities Regulatory Commission. “As of May 2021, a total of 168 applications were submitted to the CSRC, and 79 of them have been approved, compared to 41 approvals in 2020, and just 21 approvals in 2019 under the old rules,” added Chung.
Other initiatives designed to give foreign investors easier access to China – including London-Shanghai Stock Connect - are also gathering momentum, according to Chung. Under this programme, Shanghai Stock Exchange [SSE] listed companies can list Global Depository Receipts on the London Stock Exchange [LSE] giving them access to international investors. Conversely, eligible LSE listed corporates are permitted to list Chinese Depository Receipts on the SSE enabling mainland investors to trade them. One of the principal benefits of the London-Shanghai Stock Connect scheme is that it lets global investors trade Chinese securities on GMT and in foreign currencies. Elsewhere, Chung said the China-Japan ETF (exchange traded fund) Connectivity programme was leading to deeper financial ties between both countries. “HSBC was the only foreign custodian bank to support two of the four pilot Japanese ETF providers to complete the quota application, account opening, and system setup. This year, HSBC was the only custodian facilitating one Japanese asset manager to launch two new ETFs under the connectivity scheme as the second batch,” noted Chung.
Reform activity has been equally ubiquitous in the bond market too. “China’s bond market is the second largest in the world and it continues to attract international investors,” said Chung. Having opened up its fixed income market to global investors through the introduction of the CIBM (China Inter-bank bond market) regime and Bond Connect, China’s regulators are finessing the rules to make them more palatable for global investors. “Many important developments have been implemented in the domestic bond market, showing that the regulators are working very hard to create a sound and attractive investment environment for investors. Recent developments include the extension of the settlement cycle, the extension of trading hours and the introduction of recycling settlement - all of which are aimed at facilitating foreign investors participation in CIBM,” said Chung. Chung added the entry barriers for foreign investors are also being eased. “Moving forward, investors trading local bonds will only need to register once at an entity level and not at an individual fund level. Under the old rules, an entity with 20 funds would need to register 20 times. This is no longer the case,” she added.
Flourishing in China
With global investors seeking out new sources of return, many are pivoting towards Asia, namely China, where the returns are especially enticing. Nonetheless, navigating the Chinese equity and bond markets is not without its challenges. “China is a constantly evolving market, and it can be quite complex sometimes for foreign investors. In order to thrive, investors should engage with trusted counterparties such as HSBC in order to help them succeed in the Chinese market,” concluded Chung.
2 The People’s Bank of China