Blog Get Ready for China’s Great Wall of Money

Get Ready for China’s Great Wall of Money
Excited about A-shares joining the MSCI? Can’t get enough of Stock Connect? Investors are preoccupied with getting access to China and for good reason. But arguably far more significant for global markets is the billions of onshore renminbi that is increasingly looking for a home offshore.

The power of Chinese capital has already become evident over the past few years after Mainland companies went on a spending spree that saw them buy up companies and assets across the world including high profile targets such as the New York Waldorf Astoria Hotel and the Italian football team AC Milan. In 2016 alone, Chinese companies spent US$260 billion on overseas acquisitions.

But while that M&A spurt came to an abrupt end in the middle of 2017 when China introduced capital controls, the flow of Chinese money heading into overseas markets is just beginning and is a growing, long-term trend.

To put it into perspective, China is forecast to become the world’s second largest fund management market by 2019 with assets under management of US$4.3 trillion1. Now while most of that money will stay at home, a proportion is already finding its way overseas, explained Shuang Chen, CEO of China Everbright Ltd. For example, China Everbright has 30% of its assets allocated overseas, with the rest in China. And it’s worth noting that if that percentage was replicated across the industry, it would be equivalent to US$1.29 trillion of Chinese money flowing through global stock markets by 2019.

“We should look at China outbound investment as a trend that will continue for a long period of time. I believe we have to go overseas as we have accumulated a huge amount of wealth,” said Chen speaking on Day 2 of the 2018 Credit Suisse Asian Investment Conference (AIC).

Growing Influence of China's Asset Managers

Capturing Chinese Capital

For now, nowhere is feeling the impact from the great wall of money more than Hong Kong. For geographical and cultural reasons, the city is typically the first port of call for Chinese capital making its way offshore. Indeed for Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Ltd (HKEX), China’s outbound capital is one of the most significant developments in financial markets and a key driver of the bourse’s strategy.

“Chinese money is the last pot of capital of that size that defies imagination. That money has to find a home, some in China and a lot in the world,” he told the audience at his address on Day 2 of the AIC.

Perhaps HKEX’s most controversial response to this outflow of money is its decision to introduce weighted voting rights (WVRs, also known as dual-class shares) later this year in a bid to attract more Chinese technology companies. Debate has raged about the merits of allowing WVRs ever since Hong Kong lost out on Alibaba’s record $25 billion IPO in 2014 because it did not allow the structure at the time. But with Beijing pledging support for tech companies as it restructures its economy to a consumption-driven model, and Chinese tech companies becoming world leaders, the exchange really has no choice but to evolve if it wants to stay competitive.

Keep Your Friends Close…

Somewhat ironically, HKEX faces competition in trying to attract these so-called ‘new economy’ companies from the exchange that has also been its biggest partner in attracting cross-border China capital flows.

Shanghai Stock Exchange (SSE) describes missing out on the IPOs of Baidu, Alibaba and Tencent (collectively referred to as the BATs) as a huge loss and as a result it is determined not to miss out on the second generation of China’s tech giants. For this reason, SSE has introduced its ‘New Blue Chip Strategy’, explained Harry Hao Fu, Deputy Director General of the Global Business Strategy Committee, and Managing Director of the Global Business Development Department at the Shanghai Stock Exchange on his Day 3 address.

Ideas floated last week at the National People’s Congress included creating Chinese Depositary Receipts (CDRs) to encourage Chinese tech giants trading overseas to seek a domestic listing, and introducing dual-class shares in a direct challenge to Hong Kong’s plans.

All Inclusive

All of which should create more incentive for foreign investors to access China’s equity market in a year when MSCI is set to include Chinese A-shares in its Emerging Market Index. Following MSCI giving the go ahead last June, inclusion will start at a factor of 2.5% on May 31, rising to 5% by August 31.

Timeline of Chinese A-Shares inclusion in MSCI Emerging Markets Index

Source: China Market Opening 2.0, How To Trade Your Dragon, Credit Suisse

SSE certainly expects foreign investor interest to ramp up over the next few years. Through existing investment channels that include the Qualified Foreign Institutional Investor (QFII) scheme, the renminbi QFII and Stock Connect, foreign investors already hold 2% of the shares on the SSE and account for 5% of the trading. And it is expected to rise to 10% and 13% respectively in three years’ time.

For global investors, the competition means there has never been more ways to access the China growth story. The trick will be using the various channels to maximum effect while staying competitive in the face of the growing influence of China asset managers offshore. Let the battle commence.

1. Casey Quirk by Deloitte, 
http://www.caseyquirk.com/content/whitepapers/Casey%20Quirk%20-%20Leadership%20in%20Times%20of%20Plenty.pdf, 2017