Notwithstanding the multiple challenges China’s economy is facing, global investors continue to access opportunities in the country’s financial markets.
The Qualified Foreign Institutional Investor (QFI) and Stock Connect schemes are gaining momentum. However, the Qualified Domestic Institutional Investor (QDII) has seen a decline in activity, not so much due to a lack of interest among local investors as to the regulatory constraints they face in seeking opportunities in overseas markets.
Meanwhile, the slowdown in Bond Connect flows reflects investor apprehensions about the country’s real estate sector and the broader economy.
China access continues to be a key topic of the 2024 Asset Servicing Insights Asia. This annual survey of Asset Benchmark Research, covering over 220 financial institutions including asset managers, financial intermediaries, asset owners, and issuers across Asia, reveals persistent interest in China as its markets further open up to global investors.
Which of the following schemes do you use?
Source: Asset Benchmark Research
Investment schemes such as QFI and Stock Connect continue to gain strong traction.
Hedge funds investing via the QFI scheme are in high demand. According to the survey, 42% of respondents utilize the scheme, up 13% from the previous year.
Domestic banks play a significant role in the growth of QFI, which has been on the rise since 2022. As of last year, they were servicing over 56% of the newly approved QFI investors, data from the Asset Management Association of China (AMAC) show.
On the other hand, QDII has seen a slight decline in utilization. Institutional investors, such as insurance companies, are actively using the channel to capture overseas investment opportunities.
Given the poor performance of the A-share markets amid the economic uncertainties, investors are seeking diversification overseas. Custodian banks talking to The Asset note that their institutional clients have a huge demand for QDII. However, regulators have tightened the quota for the scheme, aiming to secure a “smooth growth curve for outbound investment”, according to the banks.
The survey finds that only 22% of respondents employ this scheme, an 8% drop from the previous year.
Asset service providers, including global, regional and local banks, have been lobbying for more quotas for their clients. However, the outlook remains bleak amid the regulatory tightening.
The China Interbank Bond Market (CIBM) Direct scheme remains stable with 21% utilization among respondents. However, Bond Connect has experienced a huge 24% drop in the number of respondents utilizing the scheme.
Most of the respondents who are not using Bond Connect are not investing in China at all (52%). This group of investors increased 10% from the previous year, indicating lukewarm interest in the world’s second largest bond market, with 158 trillion yuan in outstanding bonds held in custody as of 2023. China’s bond market continued to perform poorly last year amid persistent concerns over the country’s real estate market.
What are your main reasons for not using Bond Connect?
Source: Asset Benchmark Research
Meanwhile, 34% of respondents believe QFI meets their investment needs, 30% higher than in the previous year, while 10% find CIBM Direct sufficient.
In terms of asset class, A-shares continue to hold its appeal to global investors, with 88% of respondents interested or investing in them, up 35% from the previous year. Despite the wave of global investors exiting the market last August, many asset managers and asset owners still consider the valuation of A-shares appealing.
Which asset classes in China have you invested in / are you interested in?
Source: Asset Benchmark Research
As a result, the number of respondents utilizing Stock Connect continues to grow. Those using the Shenzhen-Hong Kong Stock Connect grew 19% from the previous year to 50% of respondents, while the Shanghai-Hong Kong Connect saw a 6% increase to 57% of respondents.
Interest declined in other major asset classes. Credit bonds (41%), rates (27%), and derivatives (23%) still hold some appeal, but not as strongly as before.
While global investors have shifted to private assets to avoid public market volatility and secure higher returns, private debt (7%) and private equity (5%) in China have not gathered significant interest.
