“Foreign investment embracing Chinese assets” has become the consensus of many institutions.
Foreign capital buys a lot of Chinese assets. After the net purchase reached a record high in 2021, northbound funds still accelerated the purchase of A-Shares at the beginning of 2022. At the same time, the amount of Chinese bonds held by foreign investors also hit a record high. What does China’s assets rely on to attract foreign investment? Will foreign investment continue to increase its positions in the future?
northbound funds accelerate the purchase of A-Shares
With the gradual opening of China’s financial market to the outside world, more and more foreign investors have increased their positions in Chinese stocks and bonds. According to the statistics of securities times · databao, the net purchase of A-Shares by northbound funds in 2021 was 431.2 billion yuan, and the capital inflow accelerated at the end of the year. The total net purchase from November to December exceeded 100 billion yuan. By the end of 2021, the market value of A-Shares held by Beishang capital had exceeded 2.7 trillion. If you add the market value of QFII positions at the end of the third quarter of last year, the market value of A-Shares held by foreign investors has exceeded 3 trillion yuan.
After the beginning of 2022, the inflow of funds from northbound continued to accelerate. As of January 24, the net purchase amount exceeded 42.7 billion yuan.
Northbound capital is regarded as one of the “market weathervanes”. It has successively bought big blue chips, big consumption, core assets and track stocks. Northbound capital has also experienced an exploratory period, an accelerated buying period and a profit period in the A-share market. The Shanghai stock index rose less than 20% from 2017 to 2021, while the floating profit of northbound capital exceeded 70%. The excess return is really enviable.
In recent years, the structural market of A-share has been highlighted, and the position adjustment and stock exchange of funds going north have been active. According to the statistics of data treasure, in 2018 and before, the top positions of northbound capital were dominated by large consumption stocks, favored core asset stocks in 2019, and gradually turned to manufacturing stocks in 2020 and 2021.
From the perspective of market performance, from 2017 to 2021 (based on the year-end data statistics), according to the proportion of positions in circulating shares, the market performance of the industries in which northbound capital holdings accounted for the top five was significantly better than that of other industries. The increase of shareholding in the top five industries in 2019 and 2020 was more than twice that of other industries.
foreign investors hold more than 4 trillion Chinese bonds
“Northbound” is similar to “northbound capital”, that is, the mechanism for foreign investors to invest in the mainland inter-bank bond market through the interconnection between Hong Kong bond market infrastructure and the mainland bond market. The introduction of bond link (North link and South Link) promotes capital flow, improves monetary function and improves credit environment.
Since the opening of the bond link in July 2017, foreign investors have invested in China’s treasury bonds, bank bonds and corporate bonds through multiple channels, among which government bonds and policy bank bonds are the most popular. By the end of December 2021, the total amount of Chinese bonds entrusted by foreign investors had exceeded 4 trillion yuan, including 3.68 trillion yuan of bonds held in the Hong Kong Central Clearing Corporation. Compared with the end of 2020, overseas institutions increased their holdings of inter-bank market bonds by nearly 750 billion yuan in 2021, and the scale of increase decreased year-on-year, but still exceeded market expectations. including QFII, land stock link and northbound link, the amount of Chinese assets held by foreign investors exceeds 7 trillion yuan.
The share of Chinese bonds held by foreign investors in custody (total amount of overseas investment custody / total amount of Chinese bonds custody) increased steadily. Less than 1.5% in September 2017. After May 2021, the share of Chinese bonds held by foreign investors in custody remained at about 3%. among them, foreign investors trust 2.45 trillion yuan of Chinese government bonds, accounting for 11.2% of Chinese government bonds, accounting for a record high.
three factors promote foreign capital to increase Chinese assets
In 2021, when the A-share market fluctuated in a narrow range, northbound funds accelerated their purchase, and the scale of Bond Custody also continued to expand. Then, what are the motives behind foreign investors’ big purchases of Chinese assets.
factor 1: China’s economy is improving and the trend of RMB is strong
From the perspective of China, the latest economic data show that China’s GDP exceeded 110 trillion yuan in 2021, with a year-on-year increase of 8.1%, accounting for more than 18% of the global economy, making a great contribution to driving world economic growth.
Overseas outbreaks have been repeated, and China’s economy has taken the lead in repairing. The good economic situation has effectively supported the exchange rate, and the RMB exchange rate has maintained a steady upward momentum. Since June 2020, the RMB has continued to appreciate, and the latest exchange rate has stabilized at about 6.4, a new high since May 2018. Under the expectation of RMB appreciation, global funds actively bought Chinese assets.
Factor 2: the interest rate difference between China and the United States remains high
The continued high interest rate spread between China and the United States is one of the reasons for foreign investors to buy Chinese bonds. According to data treasure statistics, taking the yield of 10-year Treasury bonds as an example, as of January 25, the yield of 10-year Treasury bonds of the United States was 1.75%, that of China was 2.69%, and the interest rate difference was close to 1 percentage point.
The risk of buying bonds is lower than that of buying stocks, and the expectation of future rise is higher. Since the opening of the North link, the interest rate difference between China and the United States has existed for a long time. After the outbreak of covid-19, the interest rate difference between China and the United States has remained high. In September 2020, the maximum interest rate difference between China and the United States reached 2.47 percentage points, and foreign investors increased their holdings of Chinese bonds by 137.5 billion yuan in that month. Although the current interest rate difference between China and the United States has a downward trend, under the expectation of RMB appreciation, foreign capital still maintains the rhythm of “buying” Chinese bonds.
factor 3: the Fed’s certainty expectation of raising interest rates is high
Externally, the covid-19 epidemic broke out on a large scale and the global economy suffered a heavy blow. In 2020, the Federal Reserve launched a comprehensive monetary easing policy, and the sharp rise of the stock market also led to inflation.
At present, the Fed’s interest rate hike has become a deterministic event, even earlier than expected. According to public data, the yield of the latest 10-year Treasury bond of the United States gradually rose, reaching a new high in recent two years. The monetary tightening policy triggered the decline of overseas stock markets. At the same time, China conducted a reverse operation, and the yield of China’s 10-year Treasury bond fell to the lowest in nearly 20 months. In this context, are Chinese assets still attractive?
Historical data show that the above operations will not weaken foreign investment enthusiasm for Chinese assets. After the opening of the North link, there have also been interest rate cuts in China and interest rate increases in the United States. From January 2018 to June 2018, the yield of China’s 10-year Treasury bonds decreased by 0.4%, the US 10-year Treasury bonds increased by 0.45%, and beixiangtong increased its holdings of bonds by nearly 400 billion yuan. In 2021, the yield of China’s 10-year Treasury bond decreased by 0.37 percentage points compared with the end of 2020, the yield of the United States 10-year Treasury bond increased by 0.59 percentage points, and beixiangtong still increased its holdings significantly.
Under the background of uncertain overseas economic situation, RMB assets have become an important option for global investors to disperse risks, which is sought after by overseas market participants. While foreign investors increased their positions in Chinese assets, the popularity of US bonds decreased significantly.
According to the statistics of data treasure, as of September 2021, the proportion of US Treasury bonds held by international investors was less than 30%, and the ratio was as low as 29.05% in 2020, the lowest in nearly 20 years.
Chinese assets will be an important allocation target for international investors
At present, the proportion of US Treasury bonds allocated by foreign capital is almost three times that of China. Looking at the Asian bond market, compared with other countries, the allocation of foreign capital to Chinese bonds is still low.
According to the report of Asia bond monitor, by the end of 2019, the proportion of foreign capital holding Philippine government bonds was as high as 38.57%, the proportion of foreign capital holding Malaysian government bonds was 25.3%, and the proportion of holding Japanese and Korean government bonds was about 15%. in contrast, the proportion of foreign capital holding Chinese government bonds is less than 6%, so there is more room for foreign capital to improve the allocation proportion of Chinese bonds.
Chinese assets have high “cost performance”
The increase of Chinese bonds confirms the confidence of overseas investors in China’s economy. At present, Chinese government bonds and national strategic bank bonds have been listed in the Bloomberg Barclays index, followed by JPMorgan Chase, and Chinese government bonds have gradually been listed in the global emerging market government bond index series. These reflect the confidence of international investors in the long-term healthy development of China’s economy and the continuous improvement of the investment and business environment.
By the end of 2021, the service scope of bondlink had been expanded to 35 countries and regions around the world, and 78 of the top 100 asset management companies in the world had completed the filing and listing of bondlink.
Looking forward to 2022, under the multiple attraction of undervalued (stocks) and low allocation (bonds) in China’s capital market and the first repair of the economy, relevant institutions believe that Chinese stocks and bonds will still be important targets for asset allocation of international investors this year. Chang Zheng of Dongfang Jincheng research and development department believes that from the “cost performance” of income and risk, compared with the low interest rate or even negative interest rate of other developed economies, the yield of RMB bonds is more attractive.
In the long run, with the systematic and institutionalized opening of China’s bond market, the development of credit and foreign exchange risk management hedging tools, the integration and improvement of infrastructure, the international integration of trading rules and the standardization of market information disclosure system, it will usher in the diversified development of overseas capital investment structure and the sustained and steady growth of investment scale.
undervalued manufacturing stocks with a high proportion of foreign investment
In addition, the attraction of Chinese assets also comes from the global competitive advantage of the manufacturing industry and the responsible attitude of opening to the outside world. Recognizing the value source of Chinese assets, international capital will naturally flow into China’s capital market on a large scale.
According to this, data treasure has counted the list of manufacturing stocks with high proportion of foreign investment and undervalued value. Among them, the shareholding proportion of land stock link is more than 5%, the shareholding proportion of QFII (at the end of the third quarter of 2021) is more than 1%, and there are only 14 manufacturing companies with valuation less than 30 times. Including Midea Group Co.Ltd(000333) , Livzon Pharmaceutical Group Inc(000513) , Sinoma Science & Technology Co.Ltd(002080) , Shengyi Technology Co.Ltd(600183) . Individual stocks such as Yantai Jereh Oilfield Services Group Co.Ltd(002353) and satellite chemistry have continued to gain additional positions in land stock since 2022; Shengyi Technology Co.Ltd(600183) , Beijing Oriental Yuhong Waterproof Technology Co.Ltd(002271) have a high proportion of QFII positions.
The net profit of these 11 companies is predicted to increase in 2021. The performance of satellite chemistry is expected to increase by 286%, Sinoma Science & Technology Co.Ltd(002080) , Shengyi Technology Co.Ltd(600183) increases by 50% or more, Tuobang shares, Beijian new materials, Autobio Diagnostics Co.Ltd(603658) or increases by more than 30%.
