– Raft of new initiatives over the next few years will see China assets become more accessible to institutional and retail investors.
– Economic and social reforms bode well for long-term growth.
– On both an historic basis and versus the rest of the world, China remains very attractive, Barings believes.
Investors in China will benefit from a series of fundamental market reforms and initiatives over the next few years, including the potential inclusion of China A stocks in the MSCI Emerging Market Index, according to Baring Asset Management (Barings), the international investment firm. Barings believes five key events and initiatives will, in particular, positively impact China and help generate strong Foreign Direct Investment flows from institutional and retail investors.
• An escalation of QFII and RQFII programmes to a multiple of their current size (across 2014-2015);
• The potential inclusion of the Renminbi (RMB) in the International Monetary Fund's Special Drawing Rights and the increasing role of the RMB as a reserve currency (2015);
• The future inclusion of China A in the MSCI EM index (2015-2016);
• Mutual recognition: allowing Hong Kong-incorporated funds to be marketed in China (2014);
• Healthcare and social security reforms (2014).
The event which would have the deepest implication would be the inclusion of the China A market in the MSCI EM index; this would depend on a series of conditions and could take place sometime over the next 5 years. This is expected to have a significant effect on demand for Shanghai and other mainland China-listed stocks. Currently, the very large and liquid A-shares are only available to Chinese investors, though selected foreign institutions can access A shares via the Qualified Foreign Institutional Investor (QFII) system.
The already anticipated and planned escalation of the QFII and similar Renminbi Qualified Foreign Institutional Investor (RQFII) programmes is a pre-requisite for the inclusion in the MSCI EM index. The acceleration of these programmes is already allowing more non-Chinese investors into the domestic market. Earlier this year, it was announced that China will almost double the quota of the QFII scheme to US$150 billion as Beijing moves to widen channels for foreign investors.
Marino Valensise, Chief Investment Officer at Baring Asset Management, comments:
"On a long-term basis, we remain bullish on China and forecast that the next five years will be a very exciting time for the country as well as for investors. From an investment point of view, China is evolving fast, driven by economic reforms, which, among other effects will continue to increase consumer demand. On top of this, we see that China domestic assets will become more accessible through the expansion of the current QFII/RQFII programmes and may eventually be considered for membership of a number of broad indices."
Proposals announced at the recent third Plenary Meeting of the 18th Congress of the Chinese Communist Party will result in China moving towards a more market-oriented economy, believes Barings, which should yield continued economic growth. Growth in the short-term may continue to face some volatility, although Barings does not expect any drop in the current growth rate.
Marino Valensise comments:
"China is undergoing far-reaching reforms that we believe should help boost more sustainable economic growth in the world's second-largest economy over the long run. The good news is that China is becoming more accessible to foreign investors, and overall, on both a historic basis and versus the rest of the world, China remains very attractive in our view."