Investors bullish on China capital-raising

In our annual survey of fund executives, sentiment towards mainland China is positive amid its relaxing outbound investment regime. Growth expectations for the market are strong.
Investors bullish on China capital-raising

Investor sentiment towards China was positive throughout AsianInvestor and Clifford Chance’s annual survey of fund industry executives, with the nation tipped to raise the most capital over the next year.

Mainland China received 33% of votes when respondents were asked which jurisdiction would see most capital raised, a 10 percentage point increase on our survey last year.

“This probably reflects the market’s recognition that China is rapidly relaxing its outbound investment regime, so it’s becoming easier for Chinese investors to invest their RMB with offshore funds,” noted Ying White, China-based funds partner at Clifford Chance.

This vote of confidence could be driven by heightened expectations around China’s expanding capital markets, rise of the renminbi and the pending cross-border mutual funds recognition scheme with Hong Kong. However, capital and investment limitations still in place in China also suggest such expectations are optimistic, to say the least.

Clifford Chance sponsored our survey, the results of which were published in the July edition of AsianInvestor magazine. To read our e-magazine online, please click here.

When respondents were asked which region would see the biggest increase in allocations, Asia was voted clearly top with 48%, followed by global emerging markets (19%), Europe (18%) and, lastly, North America (15%).

The big driver in that appears to be China. The survey asked which markets within Asia managers would overweight for growth and 17% put China on top, followed by India (12%) and Indonesia (11%).

“This [China vote] is not surprising,” added White. “The current Chinese leadership is set on dismantling entry barriers and liberalising market access. These should provide more opportunities for foreign investments and for a period of growth.”

Predictably, perhaps, the Hong Kong-China mutual funds recognition scheme was seen as the Asian passport initiative that would provide the best platform for growth, receiving 47% of votes. That was followed by the Asia Region Funds Passport with 35% and the Asean regime with 19%.

At first glance that was not such a strong vote of confidence for mutual recognition, but a big boost for the maligned ARFP scheme. However, if you consider that ARFP involves four mature economies, that Thailand and the Philippines have joined the consultation process and that if Japan was to join any Asian passport it would likely be ARFP, it appears to make more sense.

Japan is the nation that investors most want in a cross-border passport initiative, voted for by 32% of respondents. It was followed by India and Indonesia, which would presumably join the Asean scheme.

However, there still appears to be a wait-and-see attitude to launching RMB investment products either onshore in China or offshore. Asked if they had launch plans in the next 12 months, 38% said they still had no intention to do so, marginally down on 41% in last year’s survey. Some 23% responded “no, but considering”, slightly up on 21% in 2013.

In terms of how firms are gaining RMB exposure, 41% pointed to offshore RMB, with China access products – chiefly participatory notes, derivatives and swaps – next with 26%. Bringing up the rear was QFII access (18%) and RQFII (15%).

“This can be explained by the market’s interest in the pending launch of the Shanghai-Hong Kong Stock Connect programme, which should allow firms to access Chinese investments without going through the QFII or RQFII licencing and approval process and incurrence of compliance cost,” said White.

Certainly, 64% of respondents reported that they had no licence for access to China investments, with 23% saying they had a QFII permit and 13% RQFII.

“Previously it was costly and challenging for them to access China investments,” said White. “Going forward, the Shanghai-Hong Kong programme could provide an inexpensive access point.”

Ultimately, liberalisation in China will bring an end to QDII, QFII and RQFII, although most likely not for many years.

Our 2014 survey received 243 responses – the same as last year – with participants including regionally located businesses and sales executives among asset management firms, asset owners and distributors of investment product.

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