China’s already-slowing economic growth faces major headwinds as its trade spat with the US escalates – not that one can tell from the amount of offshore capital pouring into mainland Chinese stocks or the growing number of China mandates.

While institutions have pulled a net $139.4 billion from Asia-Pacific equity markets from the start of 2015 to June 30 this year, they have invested a net $3.9 billion into Chinese stocks over the same period, according to data provider eVestment (see graph below).

For Jay Kloepfer, San Francisco-based head of capital markets research at US consultancy Callan, the direction of travel is clear, even if US institutional investors are lagging their peers in Europe and Asia on China equity investment*.

American state funds, in particular, face a challenge in that “perhaps making a dedicated allocation to China while we're in the midst of a trade war doesn't look good”, he said. 

“Politics are perhaps delaying it,” Kloepfer added, “but in the longer-term, it’s hard for me to imagine that [US] institutional pension and endowment/foundation portfolios won’t have a dedicated China exposure.”

Globally, the investment into mainland Chinese equities has been particularly strong since the final quarter of 2016, when US President Donald Trump first ramped up his protectionist policies, with 11 straight quarters of net inflows totalling $11.9 billion.

ASIA-PACIFIC AND CHINA EQUITY STRATEGY FLOWS ($m) 
(Source: eVestment; Click for full view)

And the contrast with the rest of Asia appears to have held so far in 2019, with $14.4 billion fleeing broader Asia-Pacific equity strategies but $1.36 billion flowing into China-specific stock mandates. 

Of course, MSCI’s move to steadily increase the weighting of A-shares in its benchmark global emerging market index has provided structural support as passive funds are forced to adjust their holdings.  

MORE CHINA MANDATES

But long-term bullishness towards the world’s second-biggest economy is also a factor and it is helping to offset medium-term worries over the outlook for global trade – so much so, that some asset owners are increasingly setting up dedicated China equity portfolios or are considering doing so.

Hong Kong-based Value Partners, for example, won a “very sizeable” China equity mandate from a European insurance company late last year, said Au King Lun, president of the fund house. He declined to reveal the size of the strategy, which will invest in both mainland-listed A-share and Hong Kong-listed Chinese company H-shares.

Au King-Lun, Value Partners
“We’re in the process of onboarding the strategy now,” Au told AsianInvestor, adding that the deal highlighted the benefit of having a European presence after Value Partners opened an office in London in late 2016.

Others in Europe are making similar moves. London-based Coal Pension Trustees, which runs the UK’s legacy coal industry retirement funds, picked two managers for its first A-share portfolio earlier this year.

Indeed, cross-border investment specifically into A-shares via the qualified foreign institutional investor channels (both QFII and renminbi-QFII) has picked up strongly, according to eVestment. 

A net $9.1 billion has flowed into such assets since the fourth quarter of  2016, with $6.2 billion of that coming last year, its data shows.

What’s more, eVestment’s database shows RQFII/QFII China A-shares equity entered its list of top-10 “rising universes” last month, based on strategy searches made globally and in the UK by investors and consultants over the previous six months. The products appearing in the most searches were BlackRock’s Systematic China Opportunities and Schroders’s China A-share strategies.

Investors elsewhere in Asia are also showing a rising interest in China equities. For example, Value Partners is seeing requests for proposals (RFPs) and expressions of interest from Malaysian institutional investors looking to make separate China equity allocations, Au said.

Having opened a new branch in Kuala Lumpur last year, the firm is looking to develop its China capabilities there. It hired a sharia fund specialist in April and is discussing creating China equity mandates with Islamic screening.

AMERICAN INTEREST LAGGING

American institutional interest seems to be at an earlier stage, perhaps due to the current US-China tensions. Nonetheless it appears to be building, with Kloepfer indicating that his firm has already done several A-share searches this year.

For example, Value Partners is in talks with a US institution about potentially managing a “decent-sized” mandate for Greater China equities, Au said, declining to name the organisation.

And US pension plans such as Alaska Retirement Management Board (ARMB) and Washington State Investment Board are mulling the idea of separate A-share allocations.

It's just that that US interest is taking a bit longer to come to fruition.

“There is a lot of discussion [of Chinese equity investment among US pension plans], but not a lot of investing,” the global head of sales at a US fund house told AsianInvestor last month. “We haven’t seen more than 10 China-focused mandates at scale [$100 million plus] in the last 12 months.”

A-shares have accounted for most of these, he added, though some of the search activity has been exploratory, for information-gathering purposes.

Indeed, ARMB decided to engage its investment consultancy Callan to conduct an A-share manager search back in June last year. But as of late June this year it had only received presentations from Allianz Global Investors and Schroders and is yet to decide on making a specific A-share allocation. 

* A feature on how US public pension funds are approaching investing in Asia will appear in the latest (Autumn 2019) issue of AsianInvestor magazine.