World’s biggest asset manager: investors should have more in China

China should no longer be considered an emerging market, this investment giant argues.

Chinese shares are currently facing several headwinds. Recently, Chinese equities have been hit by new Covid-19 jitters. In addition, factory output and retail sales were below expectations in July, suggesting the economy is losing momentum.

However, more importantly, Chinese shares are still reeling from the tech crackdown. The increased scrutiny of China’s tech sectors shows no sign of going away, with investors intently looking for clues for the next company or group of companies to come into the firing line of the Chinese Communist Party. While some investors are taking advantage of the fear to “buy the dip”, for other investors the crackdown has shown the real and substantial political risk that comes with investing in China.

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However, according to the research unit of BlackRock, the world’s largest asset manager, investors should have much higher exposure to the country’s equities than they typically do. China should no longer be considered an emerging market, it argues. BlackRock says with Chinese equites growing in both sophistication and size, investors should up their exposure to Chinese stocks and bonds.  

Speaking to the Financial Times, Wei Li, chief investment strategist at the BlackRock Investment Institute said: “China is under-represented in global investors’ portfolios but also, in our view, in global benchmarks. It has the second-largest equity market, the second-largest bond market. It should be represented more in portfolio.”

BlackRock noted that China is currently just over 4% of the MSCI All-World Index, giving it the third-largest weighting in the index. The asset manager suggests investor allocation should be closer to 10%. That would put it ahead of Japan’s weighting of 6% but still well below the almost 60% weighting for the US.

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In the case of bonds, BlackRock suggested an even higher weighting than major fixed income indices for “some investors.” Over the past year, investors have increasingly looked towards Chinese bonds. In 2020 both Bloomberg Barclays and JP Morgan began to increase the exposure of Chinese bonds in their indices. FTSE Russell is also in the process of this.

Meanwhile, Vincent Deluard, director of global macro strategy at StoneX, recently published a report arguing that China’s desire for its currency to gain greater global adoption should be good for its bond markets. At the end of last year, Jose Garcia Zarate, an associate director of passive strategies and manager research for Morningstar, also made a case for Chinese bond exposure.