By Liu Dian Source: Global Times Published: 2017-10-17
There has been a healthy net inflow of foreign capital into the Chinese mainland`s securities market so far in 2017. Owing to the Shenzhen-Hong Kong and Shanghai-Hong Kong stock connect mechanisms, a large number of overseas investors now have access to the A-share market. From January to September 2017, the northbound net inflow totaled 155.5 billion yuan ($23.59 billion), exceeding the total amount seen in 2015 and 2016. Just in September, the northbound net inflow reached nearly 21 billion yuan.
In fact, since the beginning of 2017, foreign investment has been entering the Chinese mainland market on a large scale. Nowadays, amid the rapid development in the Chinese market, there are several reasons why it has become such a favored target for international investors.
First, China`s economic growth remains outstanding. GDP rose by 6.9 percent in the first half of 2017, higher than the target of 6.5 percent, and overall economic growth is likely to remain steady. In US dollar terms, China`s imports rose by 18.7 percent in September, far more than the figure of 13.5 percent expected by international organizations and also higher than the figure of 13.3 percent in August. In its latest "World Economic Outlook Report," the IMF once again raised China`s economic growth expectation for this year and next year, to 6.8 percent and 6.5 percent, respectively, making it the fourth time this year the IMF has raised its growth forecast for China`s economy.
The rapid economic growth is partly because of the optimization of China`s economic structure. Unlike the previous model of massive exports, internal economic activity is now more and more important. New areas of the economy that are full of investment potential are springing up in China, drawing the attention of global investors.
Second, the country`s increased opening up has provided international capital with access to China. Over the years, the Chinese government has been committed to promoting reform of the trading system and the two-way market opening. The development of the capital interconnection system, represented by the Shenzhen-Hong Kong and Shanghai-Hong Kong stock connect mechanisms, has brought a revolutionary change for the opening of China`s A-share market.
In June, Morgan Stanley Capital International (MSCI) announced that China`s A shares would be included in its widely followed Emerging Markets Index and All Country World Index (ACWI) from June 2018. This represents a big step in the opening up of China`s capital market and will also bring more overseas investment into the domestic market.
Third, with the yuan having been included in the IMF`s Special Drawing Rights (SDR) currency basket and the recent rise in foreign trade, yuan assets are now considered investable. On October 1, 2016, the yuan officially became part of the SDR currency basket with the third-biggest weighting, behind the US dollar and the euro, and higher than the pound sterling and the yen. And since May, the yuan exchange rate began its longest period of consistent strengthening in recent years, especially in August and September. Meanwhile, the yuan`s trading volume also rose sharply abroad, and the market recognition of the yuan globally has constantly improved.
In global asset allocation, the currency trend of all the countries is the primary consideration, and the appreciation of a domestic currency attracts foreign institutions to increase their asset allocation there. The impact of the yuan in the international monetary system and exchange rate is soaring. At the same time, after experiencing a roller coaster in 2015, China`s A-share performance has been relatively stable this year.
According to the State Administration of Foreign Exchange, in the first half of 2017, the net inflow of equity investment into the country was $11.6 billion, up by 87 percent year-on-year. This indicates that the attractiveness of yuan assets globally has been significantly enhanced.
This year, Moody`s and Standard & Poor`s downgraded China`s sovereign credit rating, triggering concerns in the international community about China`s macroeconomic trend, but global investors showed their positive analysis of China`s economy by backing it with their money. The inflow of international capital has also been conducive for better performance of yuan assets, such as A shares and domestic bonds. The stabilization of the yuan exchange rate has also contributed to the stability of China`s asset prices. In the next few years, China will continue to optimize its economic structure and to release the potential energy of the economy through the promotion of reform and healthy development.
The author is an assistant research fellow at the Chongyang Institute for Financial Studies, Renmin University of China.