#Articles — 14.12.2020

Enter the dragon: China’s opening of capital markets and economic

THEME 5

Investment Theme 2 | BNP PARIBAS WEALTH MANAGEMENT

Beijing's five-year plan focuses on domestic demand, as well as the opening up the domestic system and RMB internationalisation.

China's priority in technology innovation and self-sufficiency benefits domestic tech companies.

The lifting of restrictions in domestic financial markets, plus the inclusion of China A-Shares and onshore bonds in major global indices are increasingly opening up China's onshore financial assets to foreign investors. 

OUR RECOMMENDATIONS

  • Basket of Chinese technology stocks, Chinese technology funds/ETFs
  • Basket of A-Shares, A-Shares funds/ETFs
  • China’s onshore bond ETFs
  • China’s bond/balanced funds that include tech stocks, A-Shares and/or onshore bonds

 

Strategic policy shift

Beijing recently reiterated its strategic policy shift to 'Dual Circulation' in its new five-year plan, emphasising the ‘internal circulation’ (i.e. domestic demand), while continuing to push for ‘external circulation’ by opening up the domestic system and the internationalisation of the renminbi (RMB). This implies that China will continue to rebalance away from an export-driven economy and towards a more domestic-oriented economy as an insurance against deglobalisation, by focusing on technological self-sufficiency and continuing to open up its financial sector.

 

Key drivers for China’s technology companies

 

China would allocate more resources to fundamental and frontier research, as well as to the upgrading and further digitalisation of its economic structure.

US-China tensions have prompted the 'homecoming' of US-listed Chinese tech-related companies in the form of new secondary listings in Hong Kong and/or China’s A-Shares market.

Some of China’s technology companies are simply too big for global investors to ignore. Major Chinese technology names currently account for 67% of the MSCI China Index’s market capitalisation, up 10 times from merely 6% ten years ago. In addition, relative valuations for China’s top 5 tech companies (by market cap) are more attractive compared with the top 5 US tech companies at present.

More Chinese tech behemoths were added to the Hang Seng Index in 2020, bringing a great number of 'new economy' stocks to this 50-year-old and traditionally more 'old economy-driven' Hong Kong equity index. Furthermore, Hong Kong launched a new Nasdaq-like technology index (the Hang Seng Tech Index) in July 2020 with its associated ETFs attracting plenty of inflows.

 

Key drivers for China A-Shares and onshore bonds

Foreign investors’ accessibility to the onshore equity and bond markets has improved thanks to a further relaxation of restrictions in the domestic financial markets.

Stock Connect and Bond Connect enable foreign investors to trade China local bonds via the Hong Kong Stock Exchange. Strong inflows have gone through this Connect channel into the onshore markets year-to-date, likely driven by China’s 'first in, first out' (FIFO) from Covid-19, RMB appreciation and an attractive yield spread between Chinese sovereign/quasi-sovereign bonds and developed market government bonds.

Global Index providers have embarked on the initial rounds of the inclusion of A-Shares and onshore bonds into their indices, driving significant foreign inflows to the domestic markets. China A-Shares currently have a 4% weighting in the MSCI Emerging Markets Index. A full inclusion would mean a 16% weighting of A-Shares in the MSCI EM Index. Additionally, following in the footsteps of Bloomberg Barclays and JPMorgan, FTSE Russell announced the inclusion of China’s sovereign bonds into its indexes as of October 2021. Currently, foreign ownership in the second-largest bond market in the world (worth USD 15 trillion) is still below 3%. Hence, there is tremendous potential for foreign ownership of Chinese bonds to grow.

Onshore Chinese assets could be a great diversifier to global investors’ portfolios (the correlation between the MSCI AC World and the CSI 300 Index is a mere 0.3). 

MAIN RISKS

  • Slower-than-expected reform and the opening up of financial markets, which would hamper China’s progress in entering all key global stock and bond indices.
  • Lower-than-expected foreign acceptance of China’s onshore assets.
  • Intensified external scrutiny of China’s tech market access and/or the Chinese government’s increasing regulatory tightening that could suffocate growth of domestic technology companies.
  • A serious escalation of US-China tensions that hurts investor sentiment towards Chinese assets.