Corporate governance issues, market access and geopolitical risk represent the largest gaps in knowledge for European institutional investors and investment consultants considering investing in China, according to a new study undertaken by Greenwich Associates and released by investment specialist Matthews Asia.
In a presentation held by Matthew Asia’s head of global business development Jonathan Schuman, based on Greenwich Associates’ Investing in China study, it was revealed that 76 per cent of European respondents felt that corporate governance standards specifically affected their confidence in the Chinese market.
Meanwhile 68 per cent remained worried about market access, with an identical percentage concerned about geo-political risk. A lack of trust in the country’s government (63 per cent) and market volatility (58 per cent) rounded off the top five issues for respondents. Currency risk, investment performance and macro trends were also cited as knowledge gap areas.
This contrasts with its findings from Asia-focused investors previously surveyed, who had displayed similar consternations about corporate governance standards and trust in government, but only 48 percent saw market access or geo-political risk as a significant knowledge gap.
Mr Schuman challenged the perception of European investors concerned about unfavourable market access. He said that there have been increased efforts made to improve access to China and that things were developing at a rapid rate.
He utilised the growing inclusion of Chinese A-shares on key indexes when making his case.
Mr Schuman said: “One of the catalysts for investors thinking more and more about how to invest in China and how much to invest in China is the issue of index inclusion. Chinese A-shares are coming into the global emerging market indices at a rather rapid pace. MSCI is quadrupling its rating of A-shares and its global benchmarks this year while FTSE and S&P have begun to include A-shares in their global equity benchmarks.”
He added: “Perhaps less covered to date is a similar phenomenon in the bond market indices, as Chinese government have entered the most popular global bond index in April this year: the Barclays Global Aggregate. They are entering the FTSE and JP Morgan global market indices in short order as well. This means passive instruments will be investing more in Chinese equity and bond markets, and one of the reasons for the growing index inclusion is because the market access for equity investors has liberalised substantially in recent years. For example, even if you don’t have a quota to access the A-shares market - you no longer need that. Similarly, for bonds, you no longer need a so-called QFII quota in order to invest in these markets and that has just happened in the past year or two.”
Understanding the study
Greenwich Associates conducted a global research initiative in partnership with Matthews Asia, interviewing approximately 150 people across Asia-Pacific, Europe, and North America. This included 38 European institutional investors and investment consultants. The survey examined their preferences, perspectives and future plans for incorporating Chinese assets into their portfolios.
Approximately 63 percent of European respondents were focused on private and corporate pensions, while 21 percent were identified as consultants, and the remaining 16 percent focused on public and government pensions. They were based in the United Kingdom (42 per cent), Germany (24 per cent), Netherlands (18 per cent), Sweden (11 per cent) and Switzerland (5 per cent).
Just under a quarter (21 per cent) of participants represented assets over $25 billion, while one in two (52 per cent) respondents looked after less than $5 billion. In between, 17 per cent of surveyed investment consultants and investors were between $5-14.9 billion, while 10 per cent had between $15-24.9 billion.
Does China have long-term investment appeal?
Key factors mentioned by respondents for investment ranged from macro-economic developments to fund-specific necessities. The growing market size of China, which could potentially boast a higher gross domestic (GDP) product than United States by the end of next year, was the most popular reason for investing in China with 83 per cent of investors naming it as a factor.
Growing contribution to GDP (81 per cent), improved market access (72 per cent) and a favourable macro view of China (58 per cent) also featured in the top five. Fund-focused reasons were also mentioned such as the need to be included in global and emerging market indices (81 per cent) and alpha potential (56 per cent) were also listed as factors by a majority of respondents.
Forecasting the future, Mr Schuman said: “Almost all of the respondents understand that they are getting exposure to China through global emerging market equity investments such as GEM equity funds or a separate account mandate. There are a smaller number getting bond exposure through emerging market bond investments, but that number is likely to increase due to bond index inclusion.”
When commenting on the specific role of China in institutional investor portfolios, over half of the respondents (56 per cent) said that diversification remains the biggest factor. Other reasons that featured high up the list include long-term strategic allocation (41 per cent) and source of alpha (26 per cent). Meanwhile, more reactive measures such as short-term tactical bet featured lower down the rankings (12 per cent).
It wasn’t exclusively good news from a China perspective, however. Only nine per cent named opportunities for higher yields as the main factor, and just six per cent thought the chief role of China in their portfolio was sustainable growth.
Methods of exposure
Greenwich Associates’ findings revealed that the vast majority investors surveyed currently have indirect exposure to Chinese assets via emerging market or global allocations to equities and fixed income. Only five per cent did not have any exposure to China, and had no plans of exposure in the future, with a further five per cent having no exposure but were considering developing exposure to the country.
What also remains lacking is direct exposure to private and public markets, with only eight per cent of institutional investors considering it part of their organisation’s current exposure to China. This was replicated in private markets, with the increased minority figure of 21 per cent perceiving it as a current method of exposure to China for their companies.
By contrast, seven in eight respondents (84 per cent) described their organisation’s exposure to China as being focused on public equity markets in the country, accessed through in-house GEM managers. The other most common methods of exposure were through global multi-nationals (66 per cent), access to its public fixed income markets through Matthew Asia’s global bond strategy or emerging markets bond strategy which recorded percentages of 45 and 34 respectively.
Mr Schuman said: “Direct investment into China – by which we do not mean buying a single stock necessarily – but investing in a China-specific or dedicated China equity fund represents about one-fifth of the respondent base.”
The head of global business development also criticised the lack of imagination and innovation in the exposure opportunities presented by multi-national corporations.
He said: “One of the other points that we have noted is that a lot of investors – approximately two-thirds – think they are getting Chinese exposure through investments in multinational corporations
Explaining the limitations of this outlook, he said: “There are a number of very important and fast-growing sectors of the Chinese economy where multinational corporations have not made successful traction. The most notable of those is the internet and e-commerce sphere in China where local companies dominate. But increasingly there are lot of areas such as specialised consumer goods and services, and healthcare and biotechnology – some of the most innovative parts of the Chinese economy – where actually multinationals are not giving you exposure to those business models.”
