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China: An Investment Opportunity Too Big To Ignore

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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.

china investment opportunity

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.

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Investor Education

Opportunity Zones: Aligning Public and Private Capital

Opportunity zone funds (OZFs) can help the neighborhoods that need it most, while also providing significant tax benefits for investors.

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Opportunity Zones

Opportunity Zones: Aligning Public and Private Capital

At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.

Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.

Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.

Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.

What is an Opportunity Zone?

Opportunity zones are U.S. Census tracts whose citizens experience economic distress.

Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.

How are opportunity zones chosen? The initial base is low-income census tracts, which have:

  • Poverty rates of at least 20%; or
  • Median family incomes lower than 80% of the surrounding area

The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.

Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:

 Poverty RateMedian Family IncomeEducation*
Opportunity Zones27.1%$47,31618.1%
National Average14.1%$73,96531.5%

*Adult with Bachelor’s degree or higher

It’s evident these cities could benefit from increased investment.

What is an Opportunity Zone Fund?

An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.

Many investor types may take advantage of opportunity zone funds:

  • Corporations– Also includes partnerships
  • Accredited investors– Defined as high net worth individuals, brokers, and trusts
  • Nonresident foreign investors– Only on capital gains earned in the U.S.
  • Retail investors– Through funds that have lower minimums, though options are more limited

In addition to their wide eligibility, OZFs have a number of potential benefits.

Benefits

Tax breaks on capital gains can be organized into three tiers:

  • Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
  • Step-Up In Basis10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
  • Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years

All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.

 Initial InvestmentNet after-tax value
OZF$100$175.30
Standard portfolio investment$76.20 ($100- 23.8% capital gains tax)$132.36

*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.

While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.

Future Impact

Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.

By investing in businesses, OZFs can have a direct impact on economic growth and job creation.

Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.

Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.

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Finance

Bridging the Gap: Wealth Isn’t Just for the Wealthy

The UK has a financial adviser gap, leaving about 51 million adults without advice. Learn how wealthtech makes investing accessible for everyone.

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wealthtech

In the UK, money is the #1 cause of stress—ranking above physical health, work, or family.

When people begin investing, they see immediate emotional benefits compared to non-investors. In fact, investors are 16 percentage points happier, and 23 percentage points more positive about their well-being.

However, only 37% of Brits hold market-based investments. So why aren’t more people taking steps to invest? Today’s infographic from BlackRock outlines the barriers people face, and how wealthtech can help address these issues at scale.

wealthtech

The Wealth Problem

A variety of hurdles keep people from taking control of their finances.

  1. Lack of Resources: 59% of Brits feel they don’t have enough money to invest.
  2. Lack of Knowledge: 39% say a lack of knowledge holds them back.
  3. Fear of Failure: 34% are afraid of losing everything if they invest.

All of these factors culminate in insufficient investing. In fact, 50% of the €26 trillion European wealth market is currently in uninvested cash, earning zero interest.

What’s the Current Solution?

Traditionally, investment advisers helped tackle these issues. However, investors have faced challenges accessing professional advice in recent years.

A shortage of UK advisers is a main contributing factor:

  • There are only 26,700 advisers, who can service an average of 100 clients each.
  • This leaves over 51 million adults without professional advice.

Among available advisers, many impose investment minimums or fees that create barriers for lower-income populations. Financial advisers charge an average of £150/hour, and half of all surveyed advisers turned away clients with less than £50,000 to invest.

With so many hurdles to overcome, how can Brits take charge of their investments?

A Modern Solution

Wealth technology—or simply wealthtech—helps address these issues at scale, offering four main digital-first solutions:

  1. Helps investors build better portfolios.
    Gone are the days of rudimentary spreadsheets. With the help of algorithms and machine learning, investors can now automatically build sophisticated portfolios.
  2. Helps advisors scale their services.
    The automation of time-consuming processes allows advisers to service more clients.
  3. Reaches more people.
    Wealthtech is accessible for all, not just the wealthy. For example, micro-investing apps allow investors to make small, regular contributions without paying a commission.
  4. Modernises infrastructure.
    Wealthtech updates old legacy systems with more streamlined, automated systems. As a result, paper-based processes are replaced with mobile transactions that can be done with the click of a button.

These benefits can be applied across various branches of wealth management.

The Wealthtech Ecosystem

Investors can choose one of three main paths, based on their level of knowledge and interest.

“Do It Yourself” Investing
Confident investors who enjoy managing their own money can trade securities through self-directed online platforms.

“Do It For Me” Investing
Novice investors can use platforms that execute trades on their behalf, such as micro-investing or robo-advisers.

“Do It With Me” Investing
For investors in the middle of this spectrum, certain platforms offer a hybrid of digital transactions and professional advice.

With a wide variety of solutions available, investing has never been easier.

Inclusive Wealth-Building

It’s clear Brits are open to the shift: 64% say new technology would help them be more involved in their investments.

As wealthtech evolves, it will be seamlessly integrated into daily life as part of a holistic financial services offering. Traditional barriers will be broken down, empowering individuals to take charge of their financial future.

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