Megatrends: Investors weigh up China’s A-share appeal

Rising geopolitical risks and China’s economic slowdown are set to tarnish the once-vibrant appeal of A-shares over the coming 10 years.
Megatrends: Investors weigh up China’s A-share appeal
As part of its 20th anniversary magazine edition, AsianInvestor has targeted five key areas that investors will need to prioritise over the coming decade. Below, we offer an analysis on how China's economic growth and influece will impact the appeal of its stock market in the years to 2030. 
Institutional investors across the world have increasingly come to anticipate they will invest more money in China’s domestic A-share equity market in the coming years, courtesy of its increased weighing in global equity indexes. 
The advent of Covid-19 has made that destiny a little less assured.  
Some market experts believe Beijing’s ability to rapidly isolate and overcome the pandemic means it should avoid blowback from nervous international asset owners. Indeed, they think the country’s resilience may even underpin such interest. 
“We’ve seen continued interest in China’s equity market from global investors, evidenced by continued inflow of capital through the Stock Connect schemes,” Michael Wu, country executive for Greater China at Northern Trust, told AsianInvestor.
Others aren’t as sure. They point to mounting political pressure from the US in particular to ostracise China, both as a result of increasingly bellicose actions in the South China Sea and towards Taiwan, and also in condemnation of its efforts to initially cover up the severity of the coronavirus outbreak in Wuhan. 
Added to this, the pandemic has made many nations worry about their dependence on China to supply important products. Over the coming decade some will likely seek to correct that, at least in part. 
As China’s economy has grown, so has the strength of its companies – along with a desire for more capital. And asset owners across the world have begun supplying it, particularly after global index provider MSCI began adding A-shares in its emerging markets and all country world indices in June 2018. 
Its initial 5% inclusion factor has since risen to 20%. It means any investor using the two indices had to raise their exposure to the shares. 
“History shows that index inclusion can be a major catalyst for significantly increased foreign holdings of domestic assets. China is underrepresented from an investment perspective,” Adrian Chan, director for manager research on investments Asia at Willis Towers Watson (WTW), told AsianInvestor.
History shows that index inclusion can be a major catalyst for significantly increased foreign holdings of domestic assets. China is underrepresented from an investment perspective
Hong Kong-based fund manager CSOP estimated in 2018 that $400 billion of funds would flow into China, were the MSCI inclusion factor to be lifted to 100%. It stands by this prediction today, a company spokesman told AsianInvestor.
Currently, 90% of the capital flows into China A-shares are derived from active strategy including private funds, hedge funds, mutual funds and proprietary investment. Passive investment flows comprise less than 10% today, but this looks set to pick up as more A-shares are included in global indexes, according to CSOP.
Offshore interest is growing. In late April, Border to Coast Pension Partnership, a local authority retirement pool in the UK, invited fund houses to pitch for a dedicated China equity mandate of up to £300 million ($365 million).
“With the increasing weight of China in the emerging markets benchmark … we felt it was appropriate to seek a specialist partner who will provide us with a local market presence,” chief investment officer Daniel Booth said at the time.
Yet for all this interest, international asset owners have reservations about investing in China.
In the second half of 2019 Matthews Asia and Greenwich Associates conducted a survey of 118 institutional investors. Most said they were holding back on a dedicated China equity allocation due to low trust in the country’s government (67% of responses), negative perceptions of corporate governance (65%) and geopolitical risks (65%).
Then there are the rising geopolitical tensions. The US government has accused Beijing of allowing the pandemic to spread after it tried to hide its initial impact – further ratcheting tensions after two years of mounting trade disputes. 
American asset owners have become caught up in this. Rick Scott, a Republican senator for Florida, wrote on May 13 to US stock exchanges and major pension plans, urging them “to review their policies and discontinue coordination with US-listed China-based companies considering the growing threat of Communist China”.
This political pressure is having an effect. AsianInvestor reached out to several US pension funds to ask whether they planned to alter their China investment plans; none would comment. 
This article was adapted from a feature that originally appeared in AsianInvestor's 20th anniversary edition. 
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