Abundant opportunity… and risk

Outstanding government, quasi government and corporate bond issuance exceeded $27.4bn (€22.9bn) as of last August, according to the International Capital Markets Association. The equity market hit an all-time high of $10trn in market capitalisation terms last October, as calculated by Bloomberg.

The weighting of China in international equity indices is also now notable, and index inclusion has resulted in strong inflows to Chinese capital markets over recent years. Bond index inclusion is ongoing – with Bloomberg Barclays having completed its 20-month integration process and FTSE Russell starting its three-year process later this year. 

Huge numbers of investors – retail and institutional – now hold passive exposure to China through global and emerging market indices.

China’s private-equity market is also the world’s third-largest, with $60bn in additional capital deployed in 2019, according to Bain. Fundraising for private-equity firms in China grew at a compounded annual rate of 29% between 2009 and 2019. 

Writing in a Preqin report last year, Bao Fan, founder of China Renaissance Group, noted that the internet economy was equivalent to 16% of total GDP and was growing at an impressively higher clip than the rest of the Chinese economy. 

Short-video platforms like Douyin (known in the West as TikTok) represent a consequential new business model with over 400m daily viewers, averaging an hour or more of usage. Video bloggers like Li Ziqi or Li Jiaqi – aka the King of Lipstick – generate significant ecommerce revenue; Douyin is integrated with the e-commerce platform TaoBao (known in the West as Alibaba.com).

It remains to be seen whether more institutional investors will carve out dedicated allocations to Chinese assets in their portfolios given the sheer size of its markets.

The UK’s Coal Pension Trustees’ China allocation includes private equity, China A-shares and other listed Chinese companies. APG, in addition to private markets exposure and as we explore in this issue, has a three-year track record in a dedicated China A-shares mandate co-managed with Guangzhou-based E Fund Management and is in active talks with at least one large institutional investor to co-invest. The size and liquidity of the A-share market means the strategy is ripe for expansion; bringing more investors on board will also leverage the influence of APG and E Fund in terms of corporate engagement.

For APG deputy CIO Ronald van Dijk, investing in China is a skill-set in its own right, due to market microstructure, governance, language and cultural issues. 

ESG, an integral component in APG’s investment process, is also a fertile area of exploration. It is being embraced by central government in detailed reporting strictures, and in listings requirements by exchanges.

Given the sheer volume of China listed companies, AI – including machine learning and natural language processing – will be a key component for successful integration of ESG in China investment processes. 

At a government level and with COP26 slated for later this year, China’s commitment to peak emissions by 2030 and net-zero emissions by 2060 is remarkable, as are signs of co-operation between China and the EU on the Green Taxonomy. Investors and NGOs will doubtless keep a close eye on the integrity of such frameworks.

Of course, investing in China is not without its risks, including those of a political and regulatory nature, as seen in last year’s abortive IPO of Ant Group. 

Political and trade tensions have dominated the news flow on China in recent months and years, with genuine concerns about governance and human rights in Hong Kong and Xinjiang.

Despite these concerns, the picture on the ground is less strained. As the data provider Refinitiv noted recently, notwithstanding the possible retreat of some Chinese companies from their US listings, China continued to open its capital markets infrastructure during the pandemic and shows no signs of retreating from this course. 

Goldman Sachs, Morgan Stanley and Credit Suisse are among the banks that have taken advantage of new rules allowing them to take majority stakes in their mainland China securities joint ventures. 

For China, integration in global capital markets is also clearly in its long-term interest. So despite the talk of a new cold war between China and the West, few Western institutions or investors – other perhaps than the very largest public or sovereign entities – show any significant signs of scaling back their investment in Chinese securities or indeed their overall engagement in the market. 

Some might be cagey about scaling up their involvement for the time being at least, but for others the risk/return prospects are hard to ignore. 

Liam Kennedy, Editor
liam.kennedy@ipe.com