Global investors more bullish on Chinese assets

China's capital markets are gaining increasing traction among global investors as foreign investment surged back in the first half of this year, supported by the country's economic resilience, continuing opening-up policies and growing demand for more diversified and renminbi-denominated assets, officials and experts said on Tuesday.

Net inflows of foreign investment in China's securities market — including bonds and equities — reached approximately $33 billion in the first five months of the year, reversing a net outflow seen in the second half of last year, the State Administration of Foreign Exchange said on Tuesday.

The renewed confidence is particularly evident in the stock market, as foreign investors posted a net increase in holdings of $10.1 billion in onshore stocks and funds in the first half, ending a two-year trend of net outflows. During the May-June period, the net increase surged to $18.8 billion, the SAFE said.

Driven by China's sound economic fundamentals, large financial markets, improved market access and investors' diversification demand, "we expect a continuing, gradual increase in foreign allocation to renminbi assets", said Jia Ning, head of the administration's Balance of Payments Department.

Heightened volatility in global financial markets has led investors to seek more diversified asset portfolios. Renminbi-denominated assets — with currency stability and a relatively independent return profile — have become an important allocation target for global investors to diversify risks and enhance returns, Jia said.

Citing a recent survey by the Official Monetary and Financial Institutions Forum, an independent think tank concerned with central banking, economic policy and public investment, Jia said that 30 percent of central banks worldwide plan to increase their allocation to renminbi assets, while several international investment banks have upgraded their outlook on Chinese assets from neutral to overweight.

Thomas Fang, head of China global markets at UBS, said that the Swiss global wealth manager also sees rising confidence among global investors in Chinese markets, both A and H shares, as the nation's shining economic prospects help them diversify allocations from US dollar-denominated assets.

UBS has upgraded its full-year GDP growth forecast for China to 4.7 percent after the country posted 5.3 percent economic growth in the first half.

"We've been pounding the table that the overall underweight of the China assets would not be sustainable," Fang said, adding that recent opening-up policies have offered overseas investors more instruments — ranging from commodity futures to listed options — to invest in China, facilitating their risk management and helping them take bigger positions there.

Li Bin, deputy head of the SAFE, said that China's steady opening-up, high-quality economic development and growing foreign exchange market resilience will continue to help keep the renminbi exchange rate generally stable within a reasonable and balanced range, while foreign exchange regulators are well-positioned to mitigate any external shocks.

Li said that China's foreign exchange market has performed better than expected with strong resilience this year, as the renminbi strengthened by 1.9 percent against the greenback in the first half with no signs of a one-way expectation for either appreciation or depreciation.

Guo Kai, executive president of the CF40 Institute, a research center affiliated with the China Finance 40 Forum think tank, said that China should advance institutional financial opening-up in order to sustain foreign investors' rising allocation in renminbi-denominated assets and lift the Chinese currency's role as a global reserve currency.

"The key lies in continuing to improve the clarity of rules, policy transparency, data quality, market communication and the rule of law, to which international investors attach great attention," Guo said.

SAFE announced more measures on opening-up on Tuesday, including a nationwide removal of registration requirements for the reinvestment of foreign direct investment and the expansion of pilot programs that allow banks to directly process external debt registrations under the Qualified Foreign Limited Partner mechanism, through which foreign investors participate in China's private equity and venture capital markets.

From January to May, the net inflow of equity-based direct investment into China reached $31.1 billion, up 16 percent year-on-year, the administration said.