Ripple effect widens for China investors

It is not only Chinese mainland shares which are now attracting investor attention.

Over the past few years, the relevance of shares quoted on the mainland Chinese stock exchanges to global investors has grown considerably. China has opened access to its share markets via the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock connect schemes.

As we looked at last month, major stock market indices, notably the MSCI Global Emerging Markets Index, have started to include mainland shares, whereas previously China was only represented by companies listed outside the country. As the proportion of mainland shares in the indices rises, so will the weight of money heading towards the Middle Kingdom.

Another major investment sector started to gain a Chinese component from the beginning of April: the fixed interest (bond) market. One of the main, if not the main, global bond indices, the Bloomberg Barclays Global Aggregate Index, began a process of adding mainland Chinese fixed interest securities. By the end of November 2020, the index will have a 6% weighting in Chinese bonds, issued by either the Chinese government or one of the three ‘policy banks’ it controls. At the end of the process the Chinese currency, the Renminbi (sometimes called the Yuan), will be the fourth largest currency component in the index.

The mainland Chinese bond market is the world’s third largest after the US and Japan, at US$13,000bn, about 10 times the size of the offshore Chinese bond market. However, it is thought that at present foreign investors own only about 2% of onshore bonds. One reason for that low holding is that, until recently, it has been difficult for overseas investors to buy mainland bonds. That started to change in 2016 and the arrival in 2017 of Hong Kong Bond Connect (the bond equivalent of the equity market links) prompted a sharp rise in foreign purchases.

The Bloomberg initiative, following on from the recent changes to equity indices made by MSCI, underlines the growing relevance of China to global investment. The world and its investment managers are moving eastwards: you may wish to consider whether your portfolio needs to do the same.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

31st May 2019

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