For the past two decades Chinese investors have been eager to sample the broadening array of morsels available in the country’s rapidly growing equity market. Now, more foreign asset owners are looking to join the feast, with some of Australia's superannuation funds leading the way, despite deteriorating relations between Beijing and Canberra.

In October, Border to Coast Pensions Partnership of the UK and Australia's State Super separately announced mandates to increase their Chinese equity exposure. The British fund said it would allocate up to £500 million from its £46 billion ($55.8 billion) asset pot to two managers to run its China equity fund from early 2021, appointing Hong Kong-based FountainCap Research & Investment and UBS Asset Management.

Meanwhile, the A$42 billion ($31.2 billion) State Super appointed South Africa-based Ninety One, formerly Investec Asset Management, for its All China Equity mandate of undisclosed size on October 26. 

John Livanas, State Super

Additionally, in January 2020, Coal Pension Trustees (CPT), which runs the UK’s two legacy coal industry retirement funds with combined assets of £21 billion, chose Green Court Capital Management and AQR as its first two dedicated China A-share managers. CPT chief investment officer Mark Walker told AsianInvestor in March that it would hand up to £200 million ($237 million) to the selected firms. 

The appeal is obvious. Chinese stocks, including H-shares and US-listed Chinese companies, had a combined market cap of about $13 trillion as of October, which was about 60% of that of shares on the New York Stock Exchange as of the end of 2020.

Indeed, asset owners in several countries are eager to invest more into the world’s second-largest economy after its rapid recovery from the impact of the Covid-19 pandemic. Pension funds in Australia and UK, for example, have been planning friendly tenders for additional investments into China.

China’s financial authorities want to encourage foreign capital inflows to help sustain this growth and boost institutional inflows to offset the retail investors who dominate daily trading flows.

This has been a relatively easy sell, given recent performance. Equity funds investing into the country enjoyed a 21.2% return on average between January and October, well ahead of China-focused bond funds (1.5% gain) and Hong Kong equity funds (1.4% loss), according to Morningstar data.

The strength and diversification play offered by Chinese investments is attracting more foreign capital. Foreign investors held $300 billion in Chinese stock market shares in December 2019, double the amount of two years previously. And during the first half of 2020 a further $13 billion in foreign capital flowed into A-shares, partly in response to the further relaxation of rules, according to a report by Sanne, a US-based asset manager.

However, China’s appeal could come under pressure. Its relationship with the US is mired in tariffs and sanctions. In addition, Beijing’s internment of over 1 million of the Uighur minority population and suppression of protesters in Hong Kong has dissuaded some investors. Denmark's AkademikerPension fund announced in September that would divest from about DKK400 million ($65 million) in Chinese equities and bonds by the end of 2020. It is possible others could follow.

Conversely, fund managers and asset owners aspiring to greater exposure to China hope a Joe Biden presidency on January 20 will help calm the antagonistic relations, while pressurising the administration of Xi Jinping to ease its heavy-handed tactics. If that belief proves to be correct, it could prompt more investment flows towards China. 

DISMANTLING BARRIERS

For many years China restricted the ability of foreign investors to put money into its local capital markets. 

Yet it has slowly but surely eased these over the past several years, which is helping spur major changes to the country’s market development, said Stewart Aldcroft, Hong Kong-based managing director of Citi Markets & Securities Services.

The country’s relaxation efforts are part of China’s so-called 'dual circulation' strategy, under which it seeks to rely on both internal consumption and to expand cooperation with other economies, to help energise its own GDP growth.

Troy Rieck, LGIASuper

Recent liberalisation efforts include Beijing in November combining the Qualified Foreign Institutional Investor (QFII) programme with its renminbi equivalent (RQFII), having abolished requirements to hold quotas for both in September 2019. In addition, China’s regulators have added new Stock Connect schemes between the country’s bourses and those of other countries, which enable investment flows from each into into the other. 

The Shanghai and Shenzhen Connect schemes with Hong Kong are the oldest and best developed, covering a total market capitalisation of $17.5 trillion as of December 7, but others have been established with London and Switzerland. The real boon would be a Connect between China’s exchanges and the New York Stock Exchange, but this is likely to take a long time. 

International pension funds and asset managers have used these avenues to build Chinese investments, while emerging market indices have slowly been giving A-shares a heftier weighting too. The MSCI Emerging Markets Index might be the most famous example, originally allowing A-shares to be included at a reduced market cap weighting in 2017.

It has since increased the weighting to the point that A-shares enjoyed a 20% inclusion factor, meaning one-fifth of their market cap weighting has been included in MSCI’s indices. As a result, as of the end of November, China represented 40.7% of the MSCI Emerging Markets Index, although it had a smaller 5.16% weighting in the MSCI All Country World Index.

Besides MSCI, major global benchmarks like FTSE Russell and the S&P Dow Jones Indices have raised the weighting of A shares or included them into their indices. 

SUPER FUND PLANS

The addition of Chinese stocks to indices means even investors without specific mandates have built their exposure, said Ronan McCabe, head of portfolio management for the Pacific region at Mercer.

In particular, several Australian superannuation funds have been eyeing larger stakes in China – despite the recent sharp rise in geopolitical tensions between the two nations.

John Livanas, State Super’s chief executive, said its new China mandate marked a years-long plan to raise its allocation into the country over time.

“We have been enhancing our internal capability [to directly invest into Chinese stocks] since December 2018 and started to look into the asset managers for the potential mandate,” he told AsianInvestor.

“We received around 120 applications, and around 12 of these were related to China investment. After directly comparing the applications across a range of criteria, only five asset managers were shortlisted,” added Andrew Huang, senior investment manager at State Super and its point-man for the mandate.

“Our portfolio is designed to be strategically overweight China ... as of mid-November, State Super has around a 9% exposure to China, despite being tactically underweight emerging markets,” he said. 

Troy Rieck, CIO at LGIASuper, is another Sinophile investor. The A$12 billion ($8.97 billion) pension fund has built itself a A$100 million exposure to China out of a A$350 million emerging market equities allocation.

Many asset managers are increasing their exposure into other markets for diversification, and China will be among the first choices

They are not the only ones. Citi’s Aldcroft said several Australian retirement funds had been eyeing China.

“Many asset managers are increasing their exposure into other markets for diversification, and China will be among the first choices. Australia has many economic connections with China, which also paves the way for further cooperation,” he said.

However, the plans of super funds to gain more exposure are having to endure increasing tit-for-tat disagreements between the two governments, which have been exchanging aggressive language and China has implemented some tariffs on Australian imports.

Will it impact the supers’ investment plans? As of now, it seems unlikely. State Super responded to questions by noting that it would rely on the external managers it had appointed to respond to such tensions. Similarly, LGIASuper’s Rieck told AsianInvestor by email that geopolitical tensions would not greatly shift its investment strategy into China.

“From our perspective, we should focus on ‘what changes do I need to make to the investment?’” he said.

This story was adapted from a feature on international asset owners investing in China, which originally appeared in the Winter 2020 edition of AsianInvestor.