Institutional Investors and China

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Despite last year’s stock market shenanigans, U.S. institutional investors continue to eye opportunities in China. Chantal Grinderslev, a senior consultant at Z-Ben Advisors, spoke to Insight about the current state of U.S. institutional investor interest.

Insight: How much U.S. institutional money is invested in China now?

Chantal Grinderslev: “It’s difficult to give a specific number, but foreign capital accounts for just 1 to 2 percent of the capital market. U.S. institutions represent a relatively small com-ponent of that interest in China. Moreover, we have not seen U.S. institutions applying to top up their QFII quota, which is a further indication that the quota they do have has been slow to be engaged. That said, we have seen a few large players commit to the market over the course of the past year, with Fidelity, BlackRock and Vanguard all making big moves, all of which could only be interpreted as long-term plays.”

Insight: How interested are U.S. institutional investors in China?

CG: “This touches on geography. As you go farther West away from China, there’s less and less interest. Europeans have generally been far keener on China than U.S. insti-tutions. But there’s also huge interest in the development of the renminbi fixed-income space. Investors would rather put their assets in the fixed income market, which is one of the primary reasons we have seen an increase in the overall number of applications to the QFII and RQFII inter-bank bond market. This market accounts for about 95 percent of China’s bond market. That said, the bond market would benefit from far greater liquidity and product diversification.”

Insight: What kind of bonds are they buying?

CG: “Primarily policy bonds; and most of the liquidity you find is overnight repo. There are also enterprise bonds and corporate bonds, and we are seeing the government push municipal bonds as they open the market to foreign interest and push for a larger credit market.”

Insight: How is U.S. institutional investor sentiment in light of the stock market’s ups and downs?

CG: “Anyone on the ground for a long time is committed to the market; they understand that the volatility we saw in June and July [2015] just has to be weathered. They have done their research and have an onshore presence, which is critical to understanding investor sentiment. It was investor sentiment that really drove the first two weeks of this year, which frightened a lot of people because of the media headlines. Yet organizations that are committed to the market see moments like these as reasons to buy.”

Insight: When do you expect China will be included in the MSCI Emerging Markets Index?

CG: “China has been included in two sub-indices, but not yet the main emerging markets index. That again is a reflection of the global lack of familiarity with China as a separate asset class. In the region, there is this recognition that inclusion will happen at some point, and there’s an indication that it will be sometime in 2017. We have now seen from the SDR [The IMF’s Special Drawing Rights] inclusion that there is an impetus for greater exposure to the China market. China is now vastly underweighted in proportion to its contribution to global GDP; it will have to become a part of global portfolios.”

Insight: Will Western institutional investors be allowed to participate in the management of China’s regional or national social security funds? 

CG: “The provincial funds can’t really invest offshore. On the national pension side, they’re looking to reform the pension system and part of that would be amalgamating a large portion of the provincial pension funds and centralizing it within a larger authority, probably the NCSSF. That would be a logical choice, but there are other candidates, MOHRSS, being one example. Should this money be placed under the NCSSF, well, they themselves have increased their mandates for offshore managers over the past year. So if they’re being granted a much larger portion of pension assets, we could see more of that money put into the hands of foreign fund managers that have offshore experience.”

Insight: How many foreign fund managers are managing NCSSF money so far?

CG: “There are currently 14 foreign managers managing NCSSF assets offshore.”

Insight: How many foreign asset managers are currently managing Chinese assets through the QDLP program? Will the number expand?

CG: “There are at least 13 managers with QDLP licenses and a number more in-process now that regulators have expanded the type of eligible manager beyond its initial hedge-fund focus, including alternative and traditional managers as well.”

Insight: Aberdeen Asset Management had a breakthrough with its WFOE license. Does that mean it can now invest domestic Chinese investors’ money in the Chinese stock market? If so, will U.S. institutions also be hankering for similar licenses? 

CG: “Aberdeen has placed the words investment management in its business scope, as has Fidelity. However neither have been formally approved and registered with AMAC [Asset Management Association of China], leaving open to interpretation what these unique scopes actually mean for their future business development.”

Insight: Did Chinese retail investors learn anything from last year?

CG: “If you look at the market reaction, you had a very strong market rally in the spring [2015], and millions of people opening up trading accounts for the first time. They saw the market going up and wanted to participate, but those people were new to the market, likely new to investing. What they experienced over the past six months is risk, and they now understand that they should look at returns on a risk-adjusted basis. People learned that you simply cannot expect seven or eight percent returns at zero risk; there is a trade-off. That type of self-education is extremely important. Overall, this recognition that risk is indeed real, will be one of the strongest legacies of 2015.”


Grinderslev of Z-Ben Advisors covers the Chinese financial services industry, with a specialization in strategy development and execution. Her work has included developing market entry plans, advising European banks on retail business lines for the China market, and due diligence.

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