'Now is the time' to invest in China

Note: The following article is taken from the Chinese-language "Commentaries on International Affairs."

Over a thousand eligible Chinese stocks, known as A shares, were officially included into the S&P Emerging BMI on Monday, the same day as a decision by the FTSE Russell to triple the weight of Chinese shares to 15 percent took effect. These came after MSCI raised the index weighting for Chinese A-shares from 10 percent to 15 percent last month. All three major world indices providers have now included China’s A shares into their baskets, providing concrete evidence that China’s capital market and economy are becoming increasingly appealing to global investors.

[Photo: IC]

Behind the three index providers are investors holding some 40 trillion U.S. dollars of financial assets. The inclusion of China’s A shares will enable international investors to allocate their assets on China’s stock market more efficiently. It is estimated the S&P DJI inclusion, and the increased weighting for Chinese stocks by the FTSE Russell, will most likely stimulate over 14 billion U.S. dollars of capital inflow into the A share market.

The main reason behind the Chinese capital market’s attractiveness is that China is the only country among major economies to retain a normal monetary policy, whereas major developed economies are turning to monetary easing. The valuation of yuan-denominated assets is still at a relatively lower level. For instance, the price-to-earnings ratio of the Shanghai Composite Index stands at around 13, lower than that of major global stock indices, including the Dow Jones Industrial Average, which strongly appeals to international investors. In addition, China’s continuous reform of its capital market in line with internationally accepted standards has also reinforced investors’ confidence.

International capital’s foray into the A share market is a vote of confidence in China’s economic outlook. In the first half of this year, China’s economic growth rate reached 6.3 percent, the top ranking among major economies. Both the country’s industrial structure and consumption structure have shown a trend of continuous upgrades. As Ray Dalio, founder of the world’s largest hedge fund, Bridgewater, argued in August, investors still have an historic opportunity to buy into China as it opens up its markets to foreign investments and that “Now is the time” to invest in China.

Only 2 to 3 percent of the securities in China's bond and stock markets are foreign owned, which means there's a lot of room for growth. China’s series of measures, such as easing the restrictions on foreign investment in securities and futures as well as fund companies, to further open up its capital market and improve its internationalization and services level have created a more favorable environment for global investors.

The arrival of international capital, mainly focusing on long-term value when investing, can also help facilitate the development of China’s capital market by increasing market stability. In the first six months of this year, foreign investors increased their holdings of Chinese securities by more than 50 billion U.S. dollars, which helped boost the vitality of China’s market.

While the world is facing increasing economic uncertainties, the great flow of capital into China reflects the resilience, vitality and potential of the Chinese economy. The sooner one starts investing in China, the better results one will achieve. That seems to be the message signaled by the leading index providers.