Every investor, worldwide, is now forced to have Chinese equities and bonds in their portfolio, says Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed income in the Global Investment Center of the Private Bank of ABN AMRO. After much instance, the big and mighty China has finally achieved that the MSCI, the most important provider of indices, will include more Chinese A-Shares in its indices. Furthermore, Bloomberg has also added Chinese bonds to its Bloomberg Barclays Global Aggregate. These two bond indices are the most important indices in the financial market.
Billions are invested in Chinese bonds and other providers of indices are contemplating whether they are going to follow this example. If so, more capital will float towards China. As a result, Chinese investments can not be ignored any longer. Investors that do not include Chinese shares or bonds in their portfolio are very likely to fall below the benchmark.
Many investors welcome the inclusion of China in the indices. After all, the country is the third largest economy in the world with a growth rate on which we can all be jealous, so it should no longer be missing in the indices. Furthermore, because of its distinct economic model China is still in a different phase of the business cycle then we are. As such, it porives a nice diversification.
Despite all these merits, there are also some clouds on the horizon. China has an economy which is built on a very large and growing pile of debt. Moreover, it is also not clear which entity actually causes the growth of China and who owes the debt. The internal financial market is also not entirely freely accessible. It appears that it is easier to bring money to China then to get money from China. This latter is especially true when in times of a crisis, because foreign investors have a very weak legal status.
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Read the entire article, in Dutch, on IEXProfs.nl, d.d. 12 April 2019