With less than a week before MSCI announces whether it will include A-shares in its emerging-market equity indexes, Asian institutional investors are cautious about Chinese assets, citing concerns about the country’s financial system, such as its high and rising debt levels.

Speaking on the sidelines of the Financial Times’ Investment Management Summit in Hong Kong last week, three asset owners separately told AsianInvestor that their overall China exposure was not huge and they didn't plan to increase it any time soon.

They included Daisuke Hamaguchi, chief investment officer of Japan’s $36 billion Pension Fund Association; Arsa Indaravijaya, head of investment strategy at Thailand’s Government Pension Fund (GPF); and Paul Carrett, CIO of Hong Kong-based insurer FWD, with $17 billion in AUM.

GPF, for instance, only has 1.22% of its $22.4 billion in Chinese assets, evenly split between equities and bonds, and is not planning to raise that. Indaravijaya said the fund preferred to allocate to China as part of its emerging-market portfolio rather than as a separate asset class.

Meanwhile, Hamaguchi said: “Our equity position in China is close to that of India. There are some issues in China that need to be addressed.” But he did not elaborate on what the issues were.

Carrett took a similar view, citing the high and rising level of debt in China's financial system. The country's total outstanding credit stood at 206% of GDP last year, up from 160% in 2008, according to Bloomberg.

Investors regularly express in private their widespread worries about China over everything from corporate governance to the accuracy of economic data to political and regulatory risk. Indeed, their relatively low allocations to the country appear to reflect this, even as it becomes steadily easier to invest in mainland securities via channels such as Stock Connect, Bond Connect and the China interbank bond market scheme.

Long-term optimism

Still, asset owners seem bullish on the country's outlook.

Carrett said he had an impression that Beijing was facing up to the challenges and that the calibre of people dealing with the issues was extremely high. “What China has achieved over a long period of time is really extraordinary, and that will continue,” he noted.

Indeed, Mark Konyn, CIO of Hong Kong-based pan-Asia insurer AIA, pointed out that President Xi Jinping was seen as effecting needed reforms.

Much will depend on what happens later this year, he added, speaking on a panel at the FT summit and referring to fact that the 19th five-yearly national congress of China's Communist Party would take place in the Autumn.

Meanwhile, the sectors driving the mainland economy are changing, said Gokul Laroia, co-chief executive for Asia Pacific at Morgan Stanley, speaking on the same panel. The pipeline of Chinese initial public offerings in Hong Kong is now dominated by firms from sectors such healthcare, education and internet, not steel or traditional financials.

AsianInvestor will host its 4th China Global Investment Forum in Beijing on September 21. Click on the link for more details.