Foreign investors 'leery of going into China'

SHANGHAI • China has taken steps in the past 12 months to lure more money from global investors to its financial markets, but the charm offensive has not yet yielded a gush of funds from hesitant foreigners.

Investors have cited several issues as roadblocks, including lengthy registration processes and confusion over tax rules on capital gains, the Wall Street Journal (WSJ) said in a report yesterday.

In the past year, China has rolled out various measures to attract foreign money, including opening its US$9 trillion (S$12.7 trillion) bond market to overseas investors, and launching a trading link between the Hong Kong and Shenzhen bourses. The link lets foreigners trade the shares of some of China's fastest-growing companies.

Last week, regulators allowed foreign investors in the bond market to buy financial products traded domestically that will let them hedge currency risks, said the report.

But while foreigners might have long sought to invest in stocks and bonds in China, where annual economic growth is nearly 7 per cent, they seem hesitant to put their money in the Asian giant, it added.

According to WSJ research, overseas investors' Chinese bond holdings had dropped to 1.3 per cent of the total outstanding by the end of last year - down from 1.4 per cent before the market's broad opening in February last year.

NO CLEAR INVESTMENT AGENDA

No one wants to be at a cocktail party saying they don't have a China strategy. But for most firms, it's more lip service than action.

MS CHANTAL GRINDERSLEV, senior adviser at Z-Ben Advisors, a Shanghai-based strategic consultancy.

Money flowing into Shenzhen stocks from Hong Kong has been tepid, averaging just 5 per cent of the daily 13 billion yuan (S$2.66 billion) quota. A similar trend was witnessed for a link between Shanghai and Hong Kong set up in 2014.

Investors say they have hesitated partly because of concerns over time-consuming registration procedures and confusing tax rules on capital gains. Some say markets in China are too expensive, the WSJ reported, while the yuan's slide last year has held back many investors.

State interventions in the markets, such as massive share buying by government-backed funds whenever stock prices dip, is another reason investors are holding back, as are worries over whether they will be able to get their money out of China given tight capital controls.

"There's a risk that at any point the authorities can step in. That risk must be compensated for by, for example, a cheaper market," Mr Lukas Daalder, the chief investment officer at Robeco Investment Solutions, told the WSJ.

Restrictions on capital withdrawals have kept stock-index provider MSCI from including mainland-listed Chinese stocks in its key indexes. HSBC analysts have estimated that US$500 billion would pour into China shares if they were included in the MSCI Emerging Markets Index.

Capital controls and market regulation are also keeping Chinese bonds from being included in major bond indexes run by banks such as JPMorgan Chase and Citigroup that are commonly tracked by global fund managers. Goldman reckons some US$250 billion could eventually flow into Chinese debt markets if the bonds were admitted, said the WSJ report.

Yet, there are others who have been eager to jump into China.

With regulatory issues gradually being clarified, and investors being given more ability to hedge risks, many are feeling comfortable about making their move.

"We're ready, we're finalising" plans to invest in the onshore market, said Mr Jean-Charles Sambor, the deputy head of emerging-market fixed income at BNP Paribas Investment Partners in London.

Still, few foreign asset managers have created funds dedicated to China's onshore bond market, given lack of investor demand, said Ms Chantal Grinderslev, a senior adviser at Z-Ben Advisors, a Shanghai-based strategic consultancy.

"No one wants to be at a cocktail party saying they don't have a China strategy. But for most firms, it's more lip service than action,"she said.

A version of this article appeared in the print edition of The Straits Times on March 04, 2017, with the headline 'Foreign investors 'leery of going into China''. Print Edition | Subscribe