'New golden age' for China's investment sector

China's fast-growing investment and wealth management industry is embracing a golden age. The onshore markets are simply too big to ignore and will remain an attractive long-term investment destination for the rest of the world.

"Is China still investable?" is a question we have often heard in the market over the past two years, and indeed, rising geopolitical tensions and slowing headline growth — exacerbated by the COVID-19 pandemic — have raised doubts over prospects for China's markets. We are aware of these concerns and adjust allocations accordingly across asset classes and at the level of individual securities, as we do in any market. 

But when it comes to especially more pessimistic investors, we think there is a risk of missing one of the most significant evolutions taking place in the global finance industry in years — the liberalization of China's fast-growing investment and wealth management industry. You can call it a "new golden age".

Consider a few data points. While the COVID-19 pandemic has disrupted many aspects of China's economy in recent years, it has not stopped the country's mutual funds sector from growing. Total assets invested in mutual funds have risen by 71 percent since January 2020, said the Asset Management Association of China. As of the end of October, the sector's total assets under management stood at 26.5 trillion yuan ($3.94 trillion).

The expansion is mainly driven by the rapid accumulation of household assets. China's gross domestic product exceeded $10,000 on a per capita basis for a third consecutive year in 2021. A key report delivered in October at the opening session of the 20th National Congress of the Communist Party of China said that efforts will be made to substantially grow per capita GDP to be on a par with that of a "mid-level developed country" by 2035.

As a result, Chinese citizens have strong and growing demand for professional asset management services, including mutual funds.

This demand is supported by a long-term structural shift. Demographic trends like the aging population and shrinking labor force are adding downward pressure to China's neutral interest rate. In response, savers are more likely to shift more of their assets from bank savings to asset management products in search of better returns.

At the same time, as awareness for the need to save for retirement grows in China, providing new investment options for pension pools are proving a growth area for mutual funds. This is likely to gain momentum as China launches individual retirement accounts. Policymakers unveiled a new private pension scheme last year to offer supplementary retirement funding options for the aging population, alongside traditional pension programs from the government or offered by companies. We believe the new private or individual pension savings plans will prompt continuous innovation in asset management products.

Too big to ignore

From an allocation perspective, for global investors, China's onshore markets are simply too big to ignore. The equity and bond markets are both the second-largest in the world. They are playing increasingly important roles in the global economy.

Historically, it was difficult for investors outside China to access the full range of onshore assets. But this has been changing as policymakers make market access easier for foreign investors. 

With programs including Stock Connect and Bond Connect, international investors can buy and sell onshore securities via Hong Kong. As China's markets have matured and liberalized, global index providers have included more onshore bonds and equities within their benchmarks, which helps attract more foreign capital into the country.

The country's domestic markets also provide attractive risk-adjusted returns. Present valuations of Chinese equities are near historic lows. The economic slowdown and COVID-19-related restrictions have weighed on local companies' financial fundamentals, but there are still opportunities for investors to seek excess returns if they dig deeper.

Diversification benefits

China's bonds and equities have historically provided good diversification benefits for global portfolios because they present a low correlation with other asset classes. The difference between China's interest rate cycle and the policy cycles of the world's other major economies also boosts the case of Chinese assets as a diversification strategy. 

China has continued to broaden its markets by increasing the supply of high-quality and diversified financial assets. Examples in recent years include introducing a registration-based initial public offering system and launching the Nasdaq-style Shanghai Stock Exchange STAR Market. Capital market reforms in China are likely to further improve market dynamics and transparency, bringing more high-quality investment options.

Rolling out stimulus

While geopolitics may dominate the headlines, we think economic growth remains a key domestic priority for the Chinese government. We expect China to continue to roll out monetary, fiscal and regulatory stimulus measures to support the real economy. Foreign asset managers seeking to align with these efforts can leverage their experience and best practices from overseas, including in pension product offerings, sustainable investment practices and outbound investment strategies.

We have seen a lot of remarkable changes in the onshore capital markets since we opened our first Chinese mainland representative office in Shanghai in 2004. Today, as the country optimizes its COVID-19 containment, new opportunities may emerge. "Is China investable?" We think the answer is clear.

The writer is head of investment for China at Fidelity International, a global asset manager. The views don't necessarily reflect those of China Daily.