By Rob Bush, Deutsche Asset Management
So, the door has been opened. Just a crack to be sure, but opened nevertheless. We refer to MSCI’s recent decision to re-label the onshore Chinese A-share market as an emerging market, and therefore include a sliver of these stocks in its main indexes. Getting up to full weight will be a long process but, in making their decision, MSCI is recognizing something that we at Deutsche Asset Management have long been arguing – that the Chinese A-share market is simply too important to ignore.
MSCI’s vote of approval aside, there are a number of reasons why we think China may deserve consideration in a portfolio. Let’s look at the macro, the markets, and the metrics.
The Macro
As a firm we remain positive on China. We forecast the economy to grow at 6.3% this year, and next, marking a continuation of the stellar growth that has defined the Chinese economy for much of the last two decades. And it’s not just the headline number itself, rather the composition of the economy is also changing with encouraging shifts towards services and infrastructure. Throw into the mix a forecast for reasonable consumer price inflation of 2-3%, unemployment at about 4%, a fiscal deficit that we forecast will shrink from 3.4% this year to 3.2% in 2018, and a combined monetary policy rate of 4.35% and gross government debt-to-gross domestic product (GDP) of around 50%, and it seems like China has plenty of ammunition to weather any future economic storms. Of course, we’re not claiming the economy is without its problems but, let’s be frank, this is a macro palette that many developed nations would love to paint from.
The Markets
Whatever your view of investing in Chinese equity markets, you surely have to agree that the direction that policymakers have headed in over recent years is positive – the intent seems to be increased liberalization, easier access, and improved regulation. We tend to think of the US equity markets as a gold standard for how a well-run capital market should look, but let’s give China credit where it’s due – there is a determination to continually improve their market microstructure. And who can blame officials for trying to get there incrementally?
Issues remain, but the introduction of the Connect markets which link the exchanges in Shanghai and Shenzhen to Hong Kong are encouraging, as are a reduction in trading suspensions. Certainly, MSCI seem to agree, they cited access and suspensions as two of the hurdles that China had to leap and their announcement alluded to sufficient progress on both these fronts.