The vast majority of global asset owners have either increased or kept their organization’s allocation to Chinese investments in the past 12 months, according to an Economist Impact survey on global investors’ China exposure, commissioned by Invesco.
“China Position 2021”, a survey of 200 asset owners across North America, Asia Pacific, Europe, and Middle East, collected responses from senior investment professionals at global organizations on their exposure to Chinese investments between June and July 2021. It revealed that 86% of global respondents say their China exposure has either grown or maintained over the past 12 months, with 64% expecting further increases in the next 12 months; only 12% reported any expectation of reduction.Middle East investors were largely aligned with the global responses.
Chin Ping Chia, Head of Business Strategy and Development, China A Investments, at Invesco said: “The survey finds that investment sentiment from international asset owners on their China exposures has largely held stable in the past 12 months. China is the only major economy globally to show positive GDP in 2020 through the coronavirus pandemic. Despite the ongoing geopolitical tension and recent headlines on actions by Chinese regulators, the macro outlook remains strong as the country finetunes its industry policies to balance growth with sustainability. We see global investors recognize the need and benefit of a long-term China allocation as the underlying economy continues to evolve and transform.”
Josette Rizk, Director of Institutional Clients, Invesco said: “China is the world’s second largest economy, and its GDP continues to rise driven by a growing population and increasing levels of wealth. Market access is becoming easier for investors, and there is a big universe for long-term investment opportunities. Middle East sovereigns and institutional investors look to China’s domestic market to generate alpha.”
Nearly three-quarters (74%) of Middle East respondents have better expectations of economic conditions in China relative to conditions globally over the next 12 months. While COVID-19 has transformed economic behavior and financial markets, it does not seem to have changed investors’ strategic view of investing in China or where the opportunities are. Half of survey respondents believe the pandemic had increased their risk appetite towards their China exposure.
Geopolitical uncertainty from US-China trade tensions lingers this year under the Biden Administration, yet 72% of survey respondents in the region say this ongoing dynamic has had a moderate or significant influence on them to increase China exposure levels.
Onshore securities remain most popular; gearing up alternatives and technology
When it comes to asset class selections, China onshore equities is still the most popular asset class for respondents globally (52%), followed by onshore fixed income (51%) and offshore equities including H shares and US-listed China ADRs (50%). In the Middle East, current exposure to China is largely through onshore fixed income (48%) and offshore equity markets (48%), followed by onshore equities including A-shares.
Illiquid asset classes remain on global asset owners’ radar given the current low-rate environment for fixed income and continued volatility in equity markets, and the trend is reflected in respondents’ China investments. Alternatives (50%), direct ownership of companies (42%) and real estate (38%) are among the top three asset classes which regional survey respondents are planning to increase their allocation to over the next 12 months. Close to two-fifths of respondents (38%) say they will increase their allocation to onshore China corporate and local government debt.
While recent regulatory reforms in China have driven volatility in the technology sector, the survey finds that global investors continue to allocate to this segment. In the region, Technology Innovation (58%) and Financial Services (38%) remain the top investment themes for survey respondents, with Renewable Energy (36%) and Healthcare (34%) themes also capturing interest. Within Technology, Middle East asset owners are looking at opportunities from artificial intelligence or related digital automation (41%), online services for consumer or B2B (38%) and electric or ‘new energy’ vehicles (35%). 5G opportunities have also captured the interest of global respondents.
Chin Ping Chia commented: “China is already one of the most sophisticated digital economies globally and the country has by no means abandoned its ambition 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: 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 in China assets linked to new economy themes.”
Investors continue to carve out China from EM; market transparency concerns remain
As allocations to China assets form a larger part of portfolios, investors are increasingly carving China out from the emerging markets segment. Close tohalf (46%) of regional survey respondents state they have direct investments in China with a dedicated portfolio, compared to 42% in broader investments such as emerging market or Asia-focused vehicles. Improving overall portfolio efficiency (65%), serving as a safe haven from global economic woes (57%) and exposure to opportunities in specific sectors (52%)are cited as the key investment objectives of having dedicated China exposures. Investors also consider participating in China’s long-term economic growth story a major investment objective.
Survey respondents highlighted a range of factors that make China an attractive investment destination. The highest ranked factors include expectations of the growth and expansion potential of China’s economy or of listed-company profits (35%) along with improvement in the quality of financial intermediaries within China (35%).
Conversely, challenges to China investments regionally and globally mainly center on issues of corporate governance and transparency, such as a lack of trust in corporate reporting, low regulatory transparency, and opacity in China’s financial system for foreign investors. Regionally, the lack of depth/breadth in financial markets and financial products, and concerns about repatriation of funds were also cited as challenges.
ESG: A factor to beef up investors’ China exposure
Asset owners are increasingly integrating ESG factors into their investment processes globally and also for China. Half of survey respondents in the region say they always or often adopt ESG investing as part of their consideration with China exposures, with just 10% saying they rarely or never do. 58% say their China exposure has increased due to their ESG goals, as both Chinese companies and the government progressively place greater importance on ESG.
In the meantime, transparency remains a key consideration for global investors. Respondents’ top three concerns are that too few equity or bond issuers in China meet their standard for scope or quality of ESG disclosures (28%), ESG-related data from equity or bond issuers in China is not readily available (26%), and ESG-related data from equity or bond issuers in China is too difficult to verify (14%). An improvement in ESG disclosure represents a major opportunity for institutional investors, as asset owners flagged improved ESG disclosure by Chinese debt or equity issuers as a key driver that would cause them to expand their China exposure.
Chin Ping Chia concluded: “While it is still in its 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 by both companies and investors. 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.”