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Institutional investors signal a shift to dedicated China investments, says new survey

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Based on a global survey, institutional investors (pension funds, endowments, foundations, and other institutional asset owners) are planning to modify their approach to China public equity allocations. 

Based on a global survey, institutional investors (pension funds, endowments, foundations, and other institutional asset owners) are planning to modify their approach to China public equity allocations. This and other findings are presented in a research report by Greenwich Associates and Matthews Asia titled, “Crafting the Optimal China Allocation Strategy: The Asset Owner’s Perspective”.

Relative to China’s growing presence in the global economy and financial markets, current portfolio allocations among institutions are not optimised. In the study, institutional asset owners worldwide reported getting exposure to China’s equity markets primarily through emerging market equity strategies (68 per cent) and through investments in large, global multinational companies (41 per cent).

In recognition of China’s growing influence on global growth and emerging market indices, a plurality of asset owners—about one-third—view China as a long-term strategic allocation. Globally, almost half of asset owners are not yet satisfied with their China investment plans, and one-fifth plan to increase or significantly increase their dedicated allocation to China’s equity markets in the next three-five years.

Many are holding back on dedicated China equity allocation due to low trust in China’s government (67 per cent), negative perceptions of corporate governance policies (65 per cent), and questions about market access (49 per cent).

“This study highlights an important opportunity for Institutional investors regarding China’s equity markets,” says Robert Horrocks, PhD, CIO and Portfolio Manager at Matthews Asia. “These results show a disconnect between perception and reality on key issues like corporate governance. China has embarked on a program of reforms to make markets more investable, transparent and accessible.”

As asset owners compile their China portfolios, broader ESG [environmental, social and governance] considerations will play an increasingly important role. Forty-five per cent of study participants overall, view ESG factors as influential criteria. 

“At the moment, however, asset owners are taking a fairly pragmatic approach to their ESG reviews,” says Greenwich Associates Managing Director Markus Ohlig. “Of the ESG factors considered, corporate governance among Chinese companies ranks as the most important factor for over half of institutional investors.”

As this research indicates, the share of institutions with direct exposure to Chinese equities will increase as asset owners move to implement comprehensive investment strategies for this fast-growing market. And those allocations will eventually start to shift from current developed and emerging market equity strategies to dedicated China equity allocations.
 

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