Source: State Administration of Foreign Exchange (SAFE), June 2020
Though it is hard to gauge the exact breakdown of where the inflows are coming from, U.S.- and Europe-based asset managers are likely to have dominated the flows, given their interest in Chinese assets. Based on BNY Mellon internal data, cumulative purchases of Chinese government bonds showed a material lift in the past few years, with a sharp increase in 2018 and an acceleration in 2020. Such increase happened independently of periods of risk aversion surrounding the pandemic, underscoring the overall demand from custody clients targeting Chinese government bonds.
The merging of QFII and RQFII schemes, collectively referred to as ‘Qualified Foreign Investor’ (QFI), among other regulatory changes, significantly improved access into China’s capital markets, with a focus on:
The latest regulations already allowed foreign investors under the onshore schemes to access a wider range of instruments, but operating guidelines have not yet been issued. Many investors are now looking forward to seeing similar flexibility introduced to the Connect Schemes and increased liberalization in offshore markets.
IPOs in mainland China, for example, are not yet open through Stock Connect, so foreign investors wanting to buy into these listings need to go through the China onshore schemes. But there are limitations in terms of allocations and profit repatriation, preventing foreign investors from participating. Relaxations around such limitations would allow foreign investors to more easily access and participate in China IPOs.
Wider capital account liberalization will likely continue in an asymmetric manner. Although foreign inflows are highly welcome, domestic outbound flows will continue to face some restrictions, particularly during times of stress (such as episodes in February and March at the height of the global pandemic).
In the near term, given recent bond market gyrations in China, developments in the equity markets over IPOs, and increased oversight of technology and fintech companies, there probably needs to be a confidence-rebuilding exercise, with a more stable framework in sight to reassure market participants. On the external front, it remains to be seen whether Beijing will re-engage with Washington D.C. with the aim of lifting ownership restrictions on Chinese companies by U.S. investors.
In the short- and mid-term, China’s government plans to focus on technology innovation to help create jobs and keep the economy humming, and has made such plans a highlight in its most recent five-year plan. Much of this innovation may be funded through the capital markets, with new stock listings and bond offerings, so the outlook for China’s capital markets remains cautiously positive.
This article is based on a discussion shared by Kinson Tong, Director of Global Portfolio Services APAC at Invesco, Geoffrey Yu, Senior EMEA Market Strategist at BNY Mellon Markets and Magdalene Tay, Custody Product Manager of Asset Servicing APAC at BNY Mellon, at the webcast ‘China’s Capital Markets: Look Back and Look Ahead’ on November 18, 2020.
The views expressed herein may not reflect the views of BNY Mellon. This does not constitute legal, tax, accounting, investment, financial or other professional advice on any matter and does not constitute a recommendation by BNY Mellon of any kind.