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In a new report, we examine the growing opportunities for investors to gain exposure to China’s equity and bond markets, from key policy changes to their inclusion in equity and fixed income benchmarks.
China’s economic engine accounts for roughly a fifth of global output, yet foreign investors own a mere fraction of the mainland markets’ stocks and bonds due to years of restrictive government policies.
But access to China’s domestic market is gradually expanding as the Chinese government slowly and decisively eases its grip on the flow of foreign money into domestic markets. This presents an important opportunity for investors. Looser restrictions have resulted in more foreign institutional investing and increased market liquidity. The progress has given global index providers more confidence to include mainland China stocks and government bonds in benchmarks. For funds tied to those benchmarks, China’s Great Wall is looking less tall.
China is being deliberate in its approach to market liberalization in part to avoid dramatic swings in capital flows, which could add significant volatility to both financial markets and economic growth. The domestic equity markets, dominated by retail investors, have exhibited many periods of high volatility already. The presence of more foreign institutions with significant assets and long-term investing horizons would ideally lead to greater stability while diversifying the economy’s sources of capital.
But the exit door needs to appear open as well in order for foreign investors to explore relatively untested pathways to mainland exchanges. Among the subjects of foreign bond investor scrutiny is the settlement process for trades and a general wariness of local credit ratings in China’s bond market, as well as an uptick in defaults amid the country’s ongoing deleveraging drive. In addition, frequent trading halts due to volatility have caused uneasiness for overseas equity investors. And now, with trade tensions escalating with the U.S., anxiety is rising.
Even if some investors choose to remain on the sidelines for now, change is underway. Those with global portfolios would do well to familiarize themselves with the Chinese market as it continues to push forward with opening access, and opportunities, to foreign investors.
Read the full report to learn more about China’s changing policies, inclusion in equity and bond indices, and opportunities to access its markets.
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