Investors absorbed by the latest Chinese currency move may be losing sight of the big picture: China and the entire emerging Asian region are gradually being integrated into global capital markets. Over the next 12 to 24 months, we expect that Asia, led by China, will become a far more significant part of the global capital markets – and global investment portfolios.
As investors today search for income in the low-return environment, Asian markets are entering the global sphere at an opportune time. As the force driving the region, China is opening its huge markets to global investors, presenting attractive long-term opportunities for both above-market return (alpha) and market gains (beta).
China: the driving force
Currently the world’s second-largest economy by GDP, China has the largest banking system in the world by assets, the second-largest equity market by market capitalization at well over $7 trillion, the second-largest corporate credit market and the third-largest government bond market. With foreign participation in China’s local markets estimated at about 4%, growth in investment in China over the next few years has the potential to be the fastest in the history of capital markets.
While its offshore markets have been traded widely for some years, China is now focused on opening its onshore, local currency markets. Starting in 2015, the People’s Bank of China (PBOC) fully liberalized access to the onshore fixed income market for official entities like central banks and sovereign wealth funds. Others have gained access through the country’s institutional investor programs, direct yuan investment quotas and bilateral agreements.
After announcing in 2016 that it would expand foreign access to the bond market, the government opened the “Bond Link” program in early July of this year to allow foreign investors to buy domestic bonds from mainland Chinese issuers through a link with Hong Kong. The country’s “Stock Connect” programs, introduced in 2014 for the Shanghai Stock Exchange and 2016 for Shenzhen, similarly link investors to mainland equity markets via Hong Kong.
