Invesco: Chinese investments: Investors are considering China as a standalone allocation

China’s regulatory agenda

Over the past few years, Chinese regulations (like their anti-monopoly rules) have made some apprehensive about investing in China.

But it’s important to understand these regulations have been part of China’s Common Prosperity Campaign to address economic inequality and increase financial well-being. Although a lot of the population have been lifted out of extreme poverty, there remains approximately 600 million “working poor.”²

The intention of the laws were to focus on “quality of growth” as opposed to “quantity of growth”. These actions were not to drive foreign investors from China or for the country to undermine its market economy.

A lot of the underlying concerns and challenges have been the same issues faced by governments, investors and individuals worldwide.

China’s key regulatory objectives:

• Financial stability: China wants to ensure adequate risk controls for financial services companies, including sufficient capitalization.
• Data protection: Data security is an important issue for all companies and consumers, but countries have done little to protect data. Chinese policymakers believe data security is a national security issue, and as such do not want foreign entities to have access to Chinese companies’ data.
• Break-up of tech monopolies: Authorities are concerned that some companies may gain an unfair ability to set higher prices because they control an industry. They also want to ensure that smaller businesses are not at a disadvantage when competing.
• Better conditions for workers: China wants to ensure “gig workers” receive adequate treatment from employers, including earning a living wage and receiving health benefits.
• Combating climate change: The government wants to support a “greening” of the economy.

Is China investible?

Re-opening in early 2023 has created an environment supportive of strong economic growth. Kristalina Georgieva, managing director of the International Monetary Fund at Davos said that China’s successful economic re-opening “is very likely the single most important factor for global growth in 2023.”

A rapidly growing middle class is driving an increase in domestic consumption. The country has also become a manufacturing powerhouse. Production is becoming increasingly sophisticated, and exports have grown significantly.

Despite a moderation of growth in recent year, we still expect that it will continue to be stronger than developed countries.

Outlook: China is in a class of its own

The country has grown so large, we think it merits the same consideration as the US and large developed markets such as the Eurozone, Japan and the UK. 

Figure 2: China’s economy is far larger than most EMs and DMs

Note: 2021 GDP of the 30 largest economies in billions of USD. Source: World Bank, Invesco

Besides China’s large economy, there are other good reasons for investing in the country as a standalone, rather than as part of a broader global or emerging market strategy.

Looking at Figure 1, even popular index providers show they are currently understanding the importance of China within global asset markets.

For example, World Bank data suggests that China accounts for 13.0% of global equity market capitalisation, whereas it only accounts for 3.5%-4.0% of MSCI and FTSE world benchmark indices (the US is at the other extreme). China is also under- represented in government debt market indices.

On the other hand, China dominates certain benchmarks in the emerging market indices. As of 31 December 2022, China accounted for 32.3% of the MSCI Emerging Markets Index and 35.0% of the FTSE Emerging Index. Investors may wish to separate China from emerging market mandates.

The fixed income benchmarks, however, are less dominated (for example, the JP Morgan Government Bond Index Emerging Markets gives China a weighting of 10%).

Most emerging markets continue to be small economies that are very open and exposed to changes in the global economic cycle, driven mainly by the Fed’s monetary policies and the dollar. These economies respond to the global economy and their place in it.

Chinese assets, on the other hand independent nature of its economy, can perform quite differently that the US, Eurozone and emerging markets. Both private and institutional investors are increasingly thinking about a standalone China mandate.

It’s growing economy and markets gives reason for investors to view China as a class of its own. We suspect China will form an increasing share of investor strategies over the coming years.

¹ There is no guarantee that the fund will achieve these targets.

² The Brookings Institution, “Assessing China’s “Common Prosperity” Campaign”, September 2021.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Invesco Asian Fund (UK) - Please refer to the risks numbered 1, 2 and 4 Invesco Emerging Markets ex China Fund (UK) - Please refer to the risks numbered 1, 3 and 4 Invesco Global Emerging Markets Fund (UK) - Please refer to the risks numbered 1, 2 and 4

1. The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise.

2. The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.

3. As the Fund typically has a concentrated number of holdings, it may carry a higher degree of risk than a fund which invests in a broader range of holdings or takes smaller positions in a relatively large number of holdings.

4. The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.

The Invesco Asia Trust plc invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise. 

The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.

The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV. In addition, some companies are suspending, lowering or postponing their dividend payments, which may affect the income received by the product during this period and in the future.

All information as at 31 January 2023 unless otherwise stated.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This communication is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

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