It has been two years since global index complier Morgan Stanley Capital International (MSCI) included China’s A-shares on its MSCI Emerging Markets Index. The inclusion has made China’s stock market more accessible to foreign investors and Chinese assets have become a popular alternative.
As of June 17, net capital inflows through northbound trading, or money invested from Hong Kong Special Administrative Region into the Chinese mainland, totaled 1.08 trillion yuan ($153.5 billion), increasing 611.6 billion yuan ($86.5 billion) compared to that in May 30, 2018, according to Shanghai-based information provider Wind Information.
“The novel coronavirus disease (COVID-19) has inflicted heavy losses on the global economy in 2020, but with an array of policy stimulus, China has taken a lead in economic recovery, which showcased the country’s resilience,” Wang Hongpin, General Manager of Morgan Stanley Huaxin Funds, told Yicai.com.
“In the midst of a globally low interest rate environment, the return of investment in China is competitive. While its domestic financial market is going to open up wider, foreign capitals will continue to pump into the A-share market.”
On March 10, U.S. multinational investment bank JPMorgan Chase & Co. increased its stake in 15 Chinese companies by a hefty margin, according to information disclosed by the Hong Kong Exchanges and Clearing Ltd. It loaded up on 1.92 billion yuan ($271.5 million) worth shares of Ping An Insurance Group, which was its favorite one.
The companies it invested in ranged from banking, insurance, infrastructure and investment companies to energy, following China’s new beneficial policies for these industries.
China has been ramping up efforts to open up its financial sector. On June 18, the Ministry of Commerce issued a draft to solicit public opinion on administrative measures for foreign investment in listed Chinese companies, a new move to lower the threshold of the capital market.
The draft proposes an effective easing of the investment threshold by lowering the total asset requirements for foreign investors that are not controlling shareholders. Required assets of foreign shareholders will be reduced to $50 million from $100 million, and the assets they manage will be cut to $300 million from $500 million. The lock-up period for foreign investors’ holdings will be adjusted from three years to 12 months.
It also proposes elimination of the requirement for foreign investors to implement strategic investment through the direct issuance of new shares via listed companies. It says the required shareholding ratio of foreign firms that plan strategic investment through agreed-on transfers will be reduced from 10 percent to 5 percent.
“As a major country in the global industrial and supply chains, China bears an important responsibility for global economic stability. Lowering the threshold will promote the optimal allocation of Chinese and foreign resources and also drive the diversification of equity,” Dong Shaopeng, an adviser to the China Securities Regulatory Commission, told Global Times.
In addition, the State Administration of Foreign Exchange also issued new rules on May 7 to scrap quotas on the dollar-denominated qualified foreign institutional investor (QFII) scheme and its renminbi-denominated sibling RQFII, simplify the procedures for qualified investors’ repatriation of securities investment income, and create a sound policy environment for further internationalization of A-shares.
Since April 1, the authorities also scrapped the limitations on the ratio of foreign shareholdings in securities and fund management firms. The move had been originally scheduled for December but was advanced.
While domestic policies have laid a solid foundation for foreign capital inflow into the A-share market, the inclusion of Chinese stocks and bonds on global indexes such as the MSCI, FTSE Russell and S&P Dow Jones also plays a crucial role.
“After China’s inclusion into the three indexes, foreign capitals have been flowing into the Chinese market either actively or passively. Moreover, since the estimated value of A-shares is at the bottom of the global capital markets, they are attractive for foreign investors,” Yang Delong, chief economist of First Seafront Fund, told JRJ.com, an information provider for investors.
He said since some foreign index funds design their products in line with the three global indexes, as more A-shares join the indexes, these index funds will passively allocate A-shares. The benchmark of hedge funds’ performance is also in alignment with the three global indexes, thus as more A-shares join them, active capitals will also allocate A-shares. That’s why foreign capital has been continuously flowing into the market.
With measures rolled out to lower the threshold for foreign investment, investors have become more interested and confident about the Chinese market.
Recently, U.S. financial services company Morgan Stanley increased overweight on China given the country’s “stronger sovereign balance sheet” and an advantageous skew toward its e-commerce and Internet technology sectors amid the coronavirus pandemic, Jonathan Garner, managing director and chief Asia and emerging market equity strategist at Morgan Stanley, told Bloomberg.
Global investment bank Union Bank of Switzerland also emphasized in the first quarter that given the gloomy prospect of companies and the situation of the economy, European stocks are less attractive compared with Chinese ones.
“Despite uncertainties, China will become the place where BlackRock’s biggest opportunities lie in the long run, no matter in terms of asset management or investment,” Laurence Douglas Fink, Chairman and CEO of BlackRock, a U.S. multinational investment management corporation, said at the 12th Lujiazui Forum held in Shanghai, China’s financial center, on June 18.
“We will help our clients to tap the increasingly growing opportunities and increase their assets in China,” he added.
While Morgan Stanley and Goldman Sachs both increased their shares in their China securities joint ventures to 51 percent, world asset management leaders such as BlackRock and Neuberger Berman have applied to set up wholly owned mutual fund units in Shanghai, showing great attention to the Chinese capital market.
Cheng Biyi, head of Greater China at CMC Markets, a UK-based company that offers online trading in shares, said the digital economy has made great headway in China and the pandemic has advanced its growth, indicating its importance in China’s economic system. Besides, due to policy endorsement, new infrastructure and the elderly services industry also have much potential.
CITIC Securities, a Chinese securities brokerage, predicts in its second half-year investment strategies that foreign capitals, influenced by the rapid recovery of the domestic economy, low valuations and a slight appreciation of the renminbi, will actively buy A-shares.
“Chinese companies have been recognized and appreciated by global capitals, the pace of foreign investment inflow will be accelerated in the future,” Yang said.