Investing in China – A Global Mega-Trend

By all accounts, without gaining much media attention, large amounts of money are flowing into China and Hong Kong right now, particularly from large institutional investors in the US and Europe. I’ve heard this from friends in Hong Kong who are finding it hard to make sense of the contrast between the negative media reports they read over their breakfast to the large investment orders, usually placed by major American institutions, sitting on their desks by the time they arrive in the office. Recently, the value of Chinese equities reached US$10 trillion for the first time since 2015 (an increase of US$3.3 trillion since March 2020) and the currency rose 3.9% in the last quarter, the most in 12 years. It seems that the combination of new policies to encourage share trading, an easing of regulations to facilitate new listings, the increase in MSCI weightings towards China A shares, and a strengthening of the Chinese yuan are all having an impact in the rise of share values across the board. But most importantly, according to the International Monetary Fund (IMF), China is the only economy in the world showing positive GDP growth this year (1.9% growth predicted for 2020) with a faster-than-expected recovery to 8.2% GDP growth in 2021. China will soon become the largest economy in the world yet represents less than 0.5% of most investment portfolios. Large institutional investors are starting to redress the balance. We should all do the same. If you are looking for some ideas to help you invest in the China growth story, here are some of the options:

• Open a brokerage account in China and invest directly into China A shares in Shanghai or Shenzhen, or via Hong Kong’s Stock Connect
• Invest in Chinese companies listed on foreign stock exchanges, notably in Hong Kong, US, UK, Australia etc.
• Invest in Mutual Funds managed by local Chinese based fund managers based in China, or from overseas
• Buy shares in the many Exchange Traded Funds (ETFs) which invest directly into Chinese stocks and allow you to select a mix of shares that suits your preferences (eg large caps, technology stocks etc.)
• Invest in Mutual Funds which invest across Asia and Emerging Markets, including China, which enables you to diversify your exposure and access Asian companies who are benefiting from China’s growth but are listed in other markets (e.g. Singapore, India, Taiwan, Korea)
• Invest in global multi-national companies with substantial business interests in China which are listed in mature and highly liquid overseas markets (eg New York, London etc.)

You should of course take financial advice on the risks, costs and criteria for selecting any of the above options (and/or others) based on your own personal circumstances, risk appetite and long term objectives, but I hope the above is a helpful guide. Motley Fool have written a useful summary designed for retail investors considering their options in the only economy showing positive GDP growth this year (1.9% growth predicted for 2020) with a faster-than-expected recovery to 8.2% GDP growth in 2021. Furthermore, I have had some personal experience of talking to Australian based institutional investors about investing directly into Chinese A shares over many years, including introducing them to successful Chinese fund managers who were keen to promote their domestic capabilities and access Australia’s then A$1 trillion+ pool of superannuation assets (now $3 trillion). I even once spoke at the annual ASFA Conference in 2011 to a group of superannuation fund managers who thought that “I must be smoking something” when I suggested that they should consider investing directly into China’s A share market. In those days it was unusual for an institutional fund manager to allocate funds into one single market (like China or India, or even Japan and Korea) and instead they would buy an Asian fund, or an Emerging Markets basket, to diversify risk and access the local expertise of a specialist manager who would make the allocations and decisions on their behalf (for a fee, of course). Considering how much work and effort went into analysing local domestic Australian shares (a relatively small market in global terms) I thought that this was a “cop out” and a somewhat lazy approach and I may have mentioned this a few times (which probably didn’t help my cause at the time!) For many years, those of us who follow these developments closely have predicted that the apathy towards investing directly into Chinese equities would change when MSCI increased the weight of China A shares in the MSCI Indices to reflect the growing influence and contribution of Chinese companies within the global economy. In the last two years, the ‘inclusion factor’ for China A shares in the MSCI Emerging Markets Index has increased from zero to 20% which has forced foreign managers to significantly increase their China A share exposure to at least match the MSCI Benchmark. Whilst these relatively minor adjustments may not have attracted wide scale media and industry attention, the amounts involved stretch to many billions, if not trillions, of institutional fund flows, and this is one of the reasons for the strong performance of the China A share market in recent months. It’s hard to make any predictions about anything these days. But I would suggest that we’re probably witnessing the start of a “mega-trend”. You heard it here first!