Can China improve investor confidence?
HFMWeek (HFM): With a changing economic climate and more volatile movement of the currency in China, can the confidence of foreign investors be restored in order to invest in China’s capital market?
Chang Geng Lai (CGL): We think investors are still able to explore a wide spectrum of Chinese opportunities covering a range of alternative investments. Confidence in the Chinese market comes with a long-term strategy and addressing Chinese tax and regulatory requirements. What has emerged as consensus, especially among the foreign investment community is, as China grows further to be a global economy, it needs to continue its communication with all investors, both domestic and foreign, within a global context. We are happy to see China working towards that direction – RMB’s inclusion into the SDR as well as the recent interest rate policies and operations.
HFM: China is heading to be one of the world’s biggest cross-border investors in the coming years, how will this trend impact the global hedge fund business?
Aisling Keane (AK): Over the medium term, the emergence of China as a major cross-border investor will be positive for the global hedge business, although there is likely to be short-term volatility and uncertainty given current macro conditions. The contribution to alternatives will grow as Chinese investors seek broader investment strategies in order to preserve and grow their wealth.
Global managers who want to benefit from this growing market need to get their ‘feet on the ground’ so that they can build relationships and trust with the Chinese investors. Partnering with the right service provider with a deep understanding of the Chinese market can accelerate the learning process – particularly when it comes to the specific subtleties and nuances that are critical to success in China.
HFM: ‘Access to China’ and ‘China goes abroad’ are the key topics today. Could you please elaborate on the progress of different quota programmes, such as QDLP, QDII, QFII, RQFII, Stock Connect etc. Are we likely to see Bond Connect as the fastest pace growth in domestic bond market?
Benjamin Dufour (BD): We do expect further convergence of the various access programmes to China, with characteristics of the various schemes - QFII, RQFII or Stock Connect - evolving gradually towards more uniformity in terms of accessibility such as exchanges (Stock Connect access to Shenzhen), asset classes (larger share coverage, extension to ETFs, bonds), but also in terms of capital inflows and outflows (application process, repatriation), taxation, etc. This convergence will take time and until then, it remains essential for investors to carefully adapt their investment vehicles to their needs and constraints.
HFM: How can the hedge fund industry secure a meaningful distribution presence in China? Will only large firms benefit?
AK: Certain vehicles, such as the current QDLP programme, are more suited to large, well-established global managers. Fortunately, there are a number of other means by which you can access Chinese HNW investors. For example, Chinese asset managers can set up an offshore investment company in Hong Kong. They can then invest on behalf of their clients, accessing the global hedge fund market through fund of fund vehicles.
HFM: What industry trends do you expect will be of the most significance to China in the next 12 to 18 months?
CGL: We continue to anticipate that the government will allow more currency and interest rate instruments to be introduced for the domestic, corporate and individuals, as the hedging demands will increase given the irreversible trend of more liberalised currency and interest rate movement in the local market.
BD: Equity flows are still mostly driven by domestic retails, but with internationalisation underway, further openings, and at some point, inclusion in the global benchmarks, foreign institutional investors will play an increasingly important role in the market, which will also drive the demand for hedging instruments and development of derivatives markets.
James Scully (JS): It’s worth noting that the industry recognises there is a strong and maturing talent pool of investment professionals onshore in China and one of the significant offshoots that comes with the opening up of China will be their ability to invest in markets outside of China. This will create both opportunity and competition across the hedge fund and provider landscape.