China gets assist from indexers to enter world’s portfolios

Despite the country’s economic footprint, foreign investors remain underexposed

China gets assist from indexers to enter world’s portfolios

In an effort to address its slowing economy and weakening currency, the Chinese government is gradually opening its stock and bond markets to capital from foreign investors. Reflecting this effort is its inclusion in major indexes, which has driven record sums into Chinese stocks and bonds this year.

“International investors have already snapped up 219.7 billion yuan (US$32.2 billion) of shares listed in Shanghai and Shenzhen via the Stock Connect trading link with Hong Kong this year, higher than the 199.7 billion yuan they spent in all of 2017,” reported the Wall Street Journal. Official data also show that foreign holdings in the US$11.9-trillion domestic bond market leapt to 1.35 trillion yuan in July, 61% up from the previous year.

According to the Journal, China’s presence in indexes is expected to increase. The weighting of its yuan-denominated shares in the MSCI Emerging Markets Index is set to double to 0.8% on Friday, which the index provider estimates will pull in US$22 billion in inflows. In March, Bloomberg LP declared plans to infuse its global bond index with 5.5% of Chinese bonds over a 20-month period starting April 2019.

UBS Global Wealth Management reportedly estimates that China will be fully included in global stock indexes in half a decade, putting US$350 billion more into China. Paula Chan, a fixed-income senior portfolio manager at Manulife Asset Management, expects the country’s inclusion in Bloomberg’s global index, as well as benchmarks from JPMorgan and FTSE Russell, will result in US$600 billion of passive investment in China.

That’s all prognostication at this point; right now, the lack of foreign investment in China belies its significance. The International Monetary Fund estimates the country accounts for 19% of the world’s economic output when purchasing power is held equal, but the Institute of International Finance estimated foreign investors owned only 4.6% of all Chinese stocks and bonds.

“Foreign investors remain underexposed to China just based on the sheer size of the market,” Stephane Loiseau, head of cash equities and global execution services for Asia Pacific at Société Générale told the Journal.

Most foreign investors in China are institutions with longer investment time frames than the retail investors that dominate the market and often cause wild price swings with short-term bets. China’s two mainland stock exchanges have a combined market capitalization of US$7.4 trillion, reportedly the world’s second largest; investors from outside the country own only 3.5% of that.