A recent survey of institutional investors named government mistrust as the first amongst top concerns that have led to lagging implementation of dedicated China strategies.

At 67 percent, this was tied with geopolitical risks followed by subpar corporate governance standards (49 percent), according to the survey co-produced by Matthews Asia and Greenwich Associates focusing on China investment allocations. The survey was conducted in the second half of 2019 with 118 institutional investors globally, including public and private pension plans, endowments and foundations, insurance companies and sovereign wealth funds alongside 20 investment consultants.

«We made a conscious decision to not go in there in a big way,» the survey said, citing an anonymous respondent from a California-based pension fund. «[A]nd we will decide if that will change depending on changes to the governance and legal structure in China.» 

But elsewhere, this difference of opinion was only a matter of risk tolerance with another cited Australian investment consultant lauding those with a dedicated China private equity or venture capital subset as progressed with «more mature programs and understandings of the governance controls in place». 

Underweight China

Meanwhile, the penetration of asset owners remains limited. Just 14 percent of the investors surveyed had any dedicated exposure to China’s equity markets, participating primarily through emerging market strategies and the investment of large multinationals. 

But despite the worries and a low base, the outlook is improving with 23 percent of respondents looking to increase dedicated allocations to the market in the next three to five years. And only 54 percent of asset owners feel that they have fully implemented a China investment plan, leaving room for growth. 

«Given the impact that Chinese economic trends have on their own national and regional economies and markets, a greater proportion of Asian firms – relative to the global average – are actively considering hiring a China-specific manager as a way to build out their comprehensive China investment plan,» the survey added. 

Index Matters

The potential for a role in portfolios for a China allocation is obvious, with diversification (54 percent) and alpha (31 percent) both named as key reasons to invest in the market. Yet despite its obvious market size and economic clout, respondents selected index inclusion (61 percent) as the primary factor driving investor interest. This follows the recently announced delayals of further inclusion in indices by J.P. Morgan and FTSE Russell.

Still, Matthews Asia believes that such perceptions are due to be undone and opportunities could emerge in the meanwhile as China undergoes potentially transformative reforms.

«China has embarked on a program of reforms to make markets more investable, transparent and accessible — raising the bar for corporate disclosures and easing foreigners’ access to its domestic stock markets,» the survey noted. «This disconnect between perception and reality creates opportunities for active investors.»