How China is opening its doors to global investors

-- | 05/07/2018

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Emma Wall: Hello, and welcome to the Morningstar's series, "Market Reaction." I'm Emma Wall and I'm joined today by Rossen Djounov, Head of Asia for GAM.

Hello, Rossen.

Rossen Djounov: Hi, Emma.

Wall: So, today, we are going to talk about China and specifically, the way that China is opening up to the rest of the world. One key signal of this was the inclusion of MSCI, the index are including China A shares, so shares listed in Mainland China into its indices. How significant do you think that move is?

Djounov: Well, it's not that significant because the weight of stocks that was included in the index is really minimal. After all 230-something stocks included at the end of August-September time, it will correspond to something like 75 basis points of the MSCI Emerging Market Index. But it is symbolic. It is a sign of China opening up. It is more of a marketing exercise on both sides, particularly considering the timing when it was done, end of June before semi-annual rebalancing of various benchmarks. So, it's symbolic. Not huge yet, but it's a step in the right direction.

Wall: And as you say, it is symbolic because it's the latest in a slow wind of measures to help China become more accessible to international investors. There have been the Stock Connects between Hong Kong-Shenzhen and Hong Kong-Shanghai. How has that enabled investors such as yourself to access Chinese equities?

Djounov: Again, it's another step, great step, in the right direction. It makes China more accessible. It makes it easier for foreign investors to invest onshore in China, in Chinese A shares. Instead of having to go through various licensing exercises as before, which are lengthy and expensive, Stock Connect is an easy route to accessing Chinese investments for foreigners.

Wall: And there's a lot of rumours about there being a London Stock Connect or a New York Stock Connect. These seem a little pie in the sky at the moment, but is that something that we could expect in years to come?

Djounov: Well, absolutely. I mean, China is opening up. China is liberalising. China is becoming a greater player, more integrated into the global economy, into the family of markets and it will make it more and more open. So, possibly, Stock Connect with London and New York will be the next step before China moves to open up its capital accounts and makes it really easy to invest onshore.

Wall: And what are the consequences of this? Do they create opportunities, or do they create not so much problems, but also challenges for fund managers?

Djounov: Well, China is a huge economy. It's already the second-largest in the world and its market capitalisation is just Shanghai and Shenzhen, the A shares market put together, is greater than the entire capitalisation of Europe. So, it's a huge market which creates a lot of opportunities but obviously a lot of threats. China is not just as portrayed by various politicians, the culprit that steals all global technology. China has started to innovate itself, has started to contribute technologically and in terms of new products. So, it's becoming a bigger competitor globally.

Wall: And then of course, it's not just about money coming into China, it's also about China taking its money and going global. Things such as the One Belt, One Road is a real indicator of the power that China has to improve the global economy.

Djounov: Well, China has often used its financial resources to open up markets to gain market share internationally in places like Africa, Central and Eastern Europe. And One Road, One Belt is symptomatic of that using Chinese financial power, might, to open up businesses for its corporates but also to gain some competitive advantage in these places.

Wall: Now, all of this sounds very positive, but unless you can access that and profit from that, it's not useful to UK investors, to international investors. So, where are the opportunities that are created by all these measures making China more liberal?

Djounov: Well, One Belt, One Road, to start with that, it's not easy to benefit for foreign investors because it's mostly Chinese private capital invested privately in these countries. However, over time, Chinese-listed corporates are taking steps or inroads into these markets. And actually, one can access opportunities there by investing in the same A shares by selecting companies with good strong western-style corporate governance that already have made strong inroads into One Belt, One Road or have invested in western markets.

Wall: Rossen, thank you very much.

Djounov: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

 

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