China is undergoing an economic transition which should result in lower but more sustainable growth.
Unlocking the onshore market
In light of an expanding middle class and further urbanization, CIO expects the Chinese economy to be increasingly driven by household consumption and the service sector. Meanwhile, the domestic markets have grown significantly in recent decades to USD 20trn. At USD 8trn, China's equity market has become the world's second largest, and at USD 12trn, the bond market is the third biggest globally. Despite the size, foreign participation in Chinese equity and bond markets remains very small, at only around 2%. CIO believes this will change significantly as China has been gradually opening up its capital markets in recent years.
The motivation is clear: China wants foreign capital to help deepen its capital markets and increase efficiency in capital allocation. In addition, the resulting capital inflows should help create a two-way currency market and ultimately support the internationalization of its currency, the yuan or renminbi (RMB). Recent efforts, including the launch of stock and bond connect programs and the lifting of restrictions regarding foreign ownership in the financial sector, demonstrate China's desire to open up its capital markets.
Global investors are also increasingly recognizing the importance of Chinese assets in their portfolios. MSCI included A-shares into its benchmark indices in June 2018, and Bloomberg announced in March the likely inclusion of China onshore bonds in April 2019.