Just as Beijing strives to bring more foreign money and financial expertise onshore, it is moving to let more domestic capital flow overseas and local investors are keen to take advantage, say executives in Hong Kong and elsewhere.
That is despite the relatively favourable investment environment onshore and the heightened political tensions between China and Western countries such as Australia, the UK and the US.
Recent moves by Beijing to allow the qualified domestic institutional investor (QDII) allocation to increase could well be the start of a trend, said Patrick Springer, head of institutional securities business development in the US division of Huatai Securities, China’s largest securities broker.
He was speaking to AsianInvestor after a panel discussion at the Greenwich Economic Forum yesterday (November 10), during which he said there was huge interest among Chinese investors in overseas securities such as US equities.
“There could be more [QDII quota] easing depending on what the renminbi does," he added. "A stronger and more stable currency would provide more room for them to do that.”
QDII is the main quota-based system through which mainland institutions can invest overseas. China’s State Administration of Foreign Exchange said in late October that it would add $2 billion to $3 billion quarterly to the QDII allocation, up to an annual limit of $10 billion, reported local newspaper Caixin.
As of October 31, 157 financial institutions, including fund houses, securities firms and wealth managers, can invest a total of $107.3 billion via the QDII scheme. Hence the quota is still set to expand relatively slowly.
Ultimately, the Chinese authorities remain more interested in bringing money in than letting more flow out, Springer told AsianInvestor. Hence the recent further easing of the qualified foreign institutional investor (QFII) scheme for inbound capital to accelerate the quota approval process and broaden it to more types of firms.
Asked what impact the heightened geopolitical tensions between China and other nations – most notably the US – were having on his institutional clients’ views of investing there, Springer was sanguine.
“My view on markets and politics still holds: investors want to invest in assets and avoid the political noise," he said. "If they see a market with good growth potential, they try to get in before others do.”
That said, while there are likely to be less headlines about trade wars now that Donald Trump will be leaving the US presidency, he added, “clearly China has been elevated from a typical developing country status to a strategic competitor, and that won’t go away”.
Nonetheless, Springer and others on the panel argued that the outbound flows from China would grow – even in light of the attractiveness of mainland domestic assets relative to those elsewhere in terms of prospective returns.
With 10-year China government bond yields at 3.25% and 10-year US treasury yields at 80 basis points, said Eric Robertsen, global head of research at Standard Chartered Bank, “why would anybody move their capital offshore [from China]?"
“Diversification of portfolios is a major driver of that,” he added during the same panel, suggesting that there was Chinese interest in US and European credit markets and in global emerging markets.
“As China’s institutional markets start to evolve even further, portfolio construction and international diversification are going to become really important themes for onshore investors,” Singapore-based Robertsen added.
There is a huge and increasing demand from China for overseas securities, agreed Kevin Rideout, head of global client development at Hong Kong Exchanges and Clearing, speaking on the same panel. Some of that money is going into Chinese stocks in Hong Kong, like Tencent and Xiaomi, he noted, “but we see an increasing amount going to more international names like [insurance group] AIA, for example”.
It may also be the case that more companies carve out their Chinese business and list it in Hong Kong, Rideout added, as US-listed restaurant group Yum China did in September. “There may be more of those type of structures coming.”
As for specific areas of interest among Chinese investors, Springer said that he was seeing strong demand for the electric vehicle market and other themes.
“The Chinese are increasingly looking at things that are of interest to them, that they see evolving as a market in their own country, and they're applying it to some of their [overseas] investment strategies, in retail but especially institutional.”
Desiree Wang, head of China at JP Morgan Asset Management, had been similarly bullish on the prospects for outbound flows in comments made to AsianInvestor last week.
“While offshore assets are relatively less appealing at the moment given that China is leading the global economic recovery, we still see decent investor demand in diversification by investing into global high yield bond and multi-asset solution products,” she said.
Wang also sees overseas private market assets increasingly gaining traction among Chinese institutional investors and wealthy individuals.