Overview

Why China

China’s GDP continues to grow, demographics are changing, and correlation to other markets is low. Inclusion in global indices and improving ESG reporting mean that China presents significant investment opportunities.

There's a buzz among investment circles about China today. Even as the country is gradually opening up its financial markets, the recent inclusion of Chinese equities and bonds into key global indices is also prompting investors to think more strategically about their exposure to China: Is allocation based on indices sufficient to meet one's goals, or does China's influence and growth demand a more deliberate exposure?

At Invesco, we have gained significant experience about how to approach investing in China. Here, we share our insights on market structure, dynamics, and trends.

China today

There are many macro trends driving the interest in China investments, with key ones centered around growth and scale: 

Source: HSBC, Invesco, 2019

There are trends that are driving changes to China’s market dynamics and structure. Given its previous isolation, these changes now provide an opportunity:

Consumption-driven growth

The Chinese government has shown commitment to facilitate the economy’s transition from being investment-led to being consumption-driven, and from shifting its reliance on manufacturing to services.

China's inclusion in global indices is making investors sit up and take notice

Following major global index providers' decisions to increase the representation of Chinese assets in their indices, foreign inflows into China are expected to increase. We believe that with growing interest from international investors, accountability and transparency in China’s capital markets are expected to improve. 

Figure-2
Source: FactSet, MSCI, data as of September 2018.
Environmental, Social, Governance (ESG) disclosure is improving and strategies are likely to receive more attention going forward 

While the level of ESG investing has been low in China, things are changing with growing foreign interest and shifts in regulatory landscape. For example, China launched its first green bond in 2015 and is now the largest issuer in the world, while policymakers are pushing to mandate all listed companies and bond issuers to disclose ESG risks.

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.

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