European funds contribute to increase in investments into China
In the asset and wealth management domain, bilateral portfolio investment has increased by 10.4% from Europe into China and 9.0% from China into Europe since 2001, according to a joint study by PwC Luxembourg and Luxembourg for Finance (LFF).
The Chinese asset and wealth management industry has grown rapidly, with mutual fund assets increased at a 23.9% CAGR from 2010 to reach €2.44trn in 2020. European-domiciled funds accounted for an increasing share of investment into China – rising from 33.1% to 56.2% during 2017-2020 period.
In Europe, Luxembourg stood out as the primary driver of Chinese investment globally. Investment funds domiciled in the Grand Duchy account for 45.8% of global investments allocated to China and over 80% of investments made by European investment funds. However, the EU represents only a quarter of the Qualified Foreign Institutional Investor (QFII) quota allotted to foreign investors as of May 2020, highlighting the region’s attractiveness.
China’s ongoing de-regulation is strongly directed to benefit the European asset management industry. This is already showing a surge of assets into European securities, with Chinese investor assets flowing into European equities (€130.9bn) and bonds (€137bn) as of June 2020, according to the study. An example of this de-regulation effort is the ratification of the Qualified Domestic Limited Partnership (QDLP) in Beijing in 2020, which is likely to stimulate an accelerated surge of Chinese-owned investment managers establishing operations in Europe. Recently, Hong-Kong based FountainCap Asset Management launched a Chinese-equity Ucits fund in Ireland with an asset value of $1.3bn.
The increase in foreign holdings of Chinese securities and regulatory changes have opened up the country’s financial sector. Foreign holdings have increased almost eight-fold since January 2014, reaching €720bn as of September 2020, according to the Bank of China. The influx has been pronounced in China’s fixed income market, making it a promising option for debt investors, due to the country’s economic resilience, low correlation with global markets and almost unaffected interest rates throughout the Covid-19 pandemic. The lifting of restrictions on QFII and Renminbi Qualified Foreign Institutional Investor (RQFII) investment quotas in May 2020 has resulted in Chinese debt being added to several major bond indices, improving its accessibility. European investors have purchased €60.7bn in Chinese bonds by June 2020, approximately 95% of the previous year’s overall figures, highlighted the report.
A majority of foreign investor holdings are allocated to government bonds (65.2%) and policy bank bonds (31.7%). The joint study approximates that European investors hold €39bn in Chinese government bonds and €20bn in policy bank bonds. The preference for government bonds is because a lion’s share of China’s foreign investor base comprises central banks and international financial institutions, with mandates exclusively linked to government debt.
The growth in foreign ownership of Chinese securities is also strongly prevalent on the equity side. As of June 2020, foreign investor assets in the Chinese stock market amounted to €343.1bn, with European investors accounting for almost 70% (€237.5bn).
On the other hand, Chinese asset managers have built strategic partnerships with European asset management companies, under the Qualified Domestic Limited Partnership (QDLP). Since 2015, Chinese fund managers such as Value Partners, Ping An of China Asset Management, Harvest Global Investments and GF International have explored the European market by launching China-focused UCITS funds.
The study pointed out that despite the increasingly challenging diplomatic background between the two economic giants, a stable relationship could be built around urgent goals such as climate emergency and recovery from the Covid-19 pandemic.