The on-off nature of the US-China trade war has raised many questions about China’s trade and capital market environment, but there are three good reasons to be positive about the region.
First, avoiding the noise of the Donald Trump-Xi Jinping trade negotiations and taking a longer-term time horizon, things look pretty positive for the Chinese market. An eye-watering $1.5 tn of investment is expected to flow into China over the next 10 years, according to research from law firm Linklaters, accelerated by the newly signed Foreign Investment Law, which increases the scope for foreign investors’ Chinese M&A and investment strategies. The Linklaters projection is more than triple the level of the previous 10 years.
The law, signed in mid-March, takes effect on January 1, 2020, replacing three older laws governing foreign invested bodies and foreign investments in China. It promises equal treatment and intellectual property protection for foreign invested entities. Last year’s shortened ‘negative list’ – cutting restrictions for foreign investment – also sent a strong positive message to international market participants at a time when international investors and companies are developing their Chinese market experience.
Second, Morgan Stanley recently published a report predicting that China’s stock market capitalization could reach $27 tn by 2027. This is going to be significantly helped by MSCI’s decision to extend China’s weighting in its indexes, which will increase the weight of China A shares in its indexes from 5 percent to 20 percent in a three-step process. This decision follows a wide-ranging consultation with a large number of international institutional investors, from which the proposal gained overwhelming support.
According to Remy Briand, managing director and chairman of the MSCI Index Policy Committee, ‘Stock Connect [the collaboration between the Hong Kong, Shanghai and Shenzhen stock exchanges] has proven to be a robust channel to access A shares. The successful implementation of the initial 5 percent inclusion of China A shares has been a positive experience for international institutional investors and has fostered their appetite to further increase their exposure to the mainland China equity market.’
In addition, Briand notes the strong commitment by Chinese regulators to continue to improve market accessibility. This is evidenced by, among other things, the significant reduction in trading suspensions in recent months – another critical factor that has won the support of international institutional investors.
Third, this positive outlook is reinforced by the high level of CEOs in China who are more optimistic about global growth over the next 12 months than their global counterparts, according to PwC’s 22nd Annual Global CEO Survey China Report. Altogether, 73 percent of CEOs in mainland China believe global economic growth will improve, compared with 42 percent globally. China is the only economy among the major territories surveyed that is more optimistic this year than last and, given the many potential pitfalls that could hit the global economy in the near future, this seems to be a big leap of faith.
The outlook is grounded in hard reality, however. CEOs in China are confident of revenue growth despite the global economic slowdown. More than a third (35 percent) of mainland Chinese business leaders feel ‘very confident’ in their company’s prospects for revenue growth over the next 12 months, while a higher proportion (47 percent) are ‘confident’ about their company’s growth prospects over the next three years.
In short, what we may well be witnessing in China is the beginning of a developing environment that will ultimately lead the country to become – some way down the road – world’s most important global financial system.
This article was published in the summer 2019 issue of IR Magazine