Investor Education
China: An Investment Opportunity Too Big To Ignore
Since the implementation of the initial Open Door Policy in 1978, China has experienced rapid development—making it the world’s second largest economy in nominal terms.
In the next year, the country will move into the next phase of opening up its economy by lifting restrictions on the foreign ownership of securities, insurance, and fund management firms, and this will make the economy more accessible to the outside world than ever before.
An Opportunity Too Big To Ignore
Today’s infographic from BlackRock explores the steps China’s markets have taken to attract foreign capital on a global scale.
China’s moves are funding the nation’s next stage of growth, and are also creating new investment opportunities for foreign investors.
The China Investment Opportunity
Currently, foreign investors hold just 3% of total Chinese securities, despite the country having the world’s second largest stock and bond market globally.
As the onshore equity and fixed income markets open up, investors have the opportunity to gain exposure to more sectors, particularly those that focus on the domestic economy.
China’s large consumption base of 1.3 billion consumers is a powerful engine of growth, with consumer spending increasing to $4.7 trillion in 2017, from $3.2 trillion in 2012.
Ensuring Sustainable Growth
There are structural reform gaps that need to be addressed in order to ensure China’s growth is sustainable.
These reforms, which seek to correct imbalances caused by uneven economic growth, cover many areas of the economy. They affect the government, as well as corporate, financial and household sectors.
Some of these key reforms include:
- Capital reallocation: Debt reduction and interest rate liberalisation
- Income redistribution: Property, household and corporate tax reduction
- Market regulation: Supply-side reform and environmental protection
- Institutional framework: Intellectual property protection, and reformation of the hukou— China’s registration program, which serves to regulate population distribution and rural-to-urban migration
With 22 reforms currently in progress, the long-term impact is expected to be tremendously positive for growth.
Opening Up the Great Wall
China has shown great support for economic globalisation, and has already been making strides to open its markets to the rest of the world.
- 2002: Qualified Foreign Institutional Investor (QFII) scheme launches
- 2011: Renminbi Qualified Foreign Institutional Investor (RQFII) scheme launches
- 2014: Shanghai/Hong Kong Stock Connect launches
- 2016: Shenzhen/Hong Kong Stock Connect launches
- 2017: Bond Connect scheme launches
- 2018: MSCI announces 20% inclusion factor of A-shares
- 2019: Bloomberg Barclays Global Aggregate Index begins including yuan-denominated bonds
- 2020: JPMorgan Chase & Co. plans to add Chinese government debt to index
These index inclusions will result in a substantial inflow of new investor funds. According to Goldman Sachs, Bloomberg’s decision to increase the weighting of Renminbi-denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index could attract between $120-$150 billion in new investments into Chinese debt markets.
New China vs. Old China
China has transformed from an export-driven and rural country, into a global manufacturing and technology superpower.
Foreign direct investment (FDI) inflows into China’s tech sector have been rising significantly, and currently account for almost a third of total FDI.
China already has the world’s largest robot market, and the government is actively promoting the robotics industry with tax reductions and special R&D funding.
—Victoria Mio, CIO Chinese Equities, Robeco
China’s ambitious “Made in China 2025” ten year plan will lower its dependency on imported technology and make China a dominant player in global technology manufacturing.
An Economic Force To Be Reckoned With
China will inevitably face challenges as it proceeds to lead global economic growth. However, its changing economy is creating a new landscape of opportunity for potential growth, and may continue to do so for the coming years.
The continuous expansion of market access, combined with new policies that promote foreign investment, have helped improve investor confidence. If foreign investors exclude China from their portfolio, they risk missing out on the huge potential of this rapidly expanding market.
Investor Education
Visualized: A Step-by-Step Guide to Tax-Loss Harvesting
In Canada, tax-loss harvesting allows investors to turn losses into tax savings. This graphic breaks down how it works in four simple steps.
A Step-by-Step Guide to Tax-Loss Harvesting
Market ups and downs can be unnerving, but the good news is that tax-loss harvesting allows investors in Canada to capture tax savings when their portfolio drops in value.
While it sounds complicated, a tax-loss harvesting strategy is actually fairly straightforward. An investor can use capital losses to offset capital gains found elsewhere in their portfolio, leading to a lower tax bill. While there are important conditions to keep in mind, investors can use this strategy to enhance portfolio returns over time by reinvesting these tax savings.
This graphic from Fidelity Investments shows how tax-loss harvesting works and why it may improve tax efficiency in an investor’s portfolio.
Breaking It Down
Consider a person who invested $50,000 in a mutual fund held in a non-registered account that has dropped by $10,000 in value. To help minimize losses, they took the following steps in a tax-loss harvesting strategy.
For the sake of this example, taxes are based on the maximum federal rate and the average maximum provincial tax rate.
- Sold investment with a $10,000 loss
- Invested $40,000 into a different mutual fund
- Used the $10,000 capital loss to offset capital gains realized elsewhere in the non-registered portfolio
- Achieved up to $2,550 in tax savings
The investor realized as much as $2,550 in tax savings by utilizing a $10,000 loss against a $10,000 capital gain. Without tax-loss harvesting, this $10,000 capital gain would be taxed at a 50% capital gains inclusion rate ($10,000 X 50% = $5,000). This $5,000 in applicable gains is then taxed at a 51% combined federal and provincial tax rate ($5,000 X 51% = $2,550 in taxes owed).
In contrast, by using tax-loss harvesting, the investor would have achieved up to $2,550 in tax savings.
What’s more, you can reinvest your tax savings over each year—which may help boost portfolio returns over time if the new investment increases in value.
Tax-Loss Harvesting Tips
With a tax-loss harvesting strategy, here are some key tips and considerations to keep in mind:
- Investment Timeline: A capital loss can be used to offset capital gains not only in the current year, but in the three years prior and/or any year indefinitely in the future.
- New Investment Type: After selling an investment that’s dropped in value, it’s important to buy a different investment to avoid triggering the ‘superficial loss rule’. Investors can aim to choose an investment with similar long-term returns.
- Plan for Year-End: In order to achieve a capital loss, plan to sell an investment at least two to three days before the year’s final trading day so the investment settles before year-end.
Together, these tips can help investors strategically execute a tax-loss harvesting strategy.
Tax Made Easier
During volatile markets, investors can seize the opportunity to turn losses into tax savings using tax-loss harvesting as a key tool to help generate higher after-tax returns.
Explore Fidelity’s tax calculator to discover tax-saving opportunities.
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