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.