China’s post-zero-Covid investment boom

17 May 2023

Since China dropped its restrictive zero Covid-19 policy, foreign financial institutions and asset managers have renewed their appetite for Chinese securities. At the same time, the Middle Kingdom’s financial institutions are looking offshore in search of diversification beyond their domestic market. flow explains the advantages of working with banks with fund custody licences in China

After loosening its stringent pandemic era restrictions and re-opening its economy last December, China’s gross domestic product (GDP) bounced back, with real GDP growth coming in at 4.5% year-on-year, exceeding market expectations by 0.5%.

Deutsche Bank economists point out in their report China Macro: Shifting growth (18 April), “China's post-reopening recovery has not come to an end, in fact it still has a long way to go”. They highlight three sources of economic growth:

  • The strong credit impulse over recent months will likely lift domestic demand with a six to nine-month lag;
  • Better labour market conditions will boost consumer income and support spending; and
  • The property sector will likely continue to recover.

“We maintain our above-consensus GDP growth forecast of 6% in 2023 and 6.3% in 2024,” notes the report. As one of only a handful of major markets expected to avoid a recession this year, foreign institutions are taking a renewed interest in what China has to offer.1

Institutional investor responses

According to Tony Chao, Head of Securities Services, Greater China at Deutsche Bank, “Foreign investors are leveraging an array of access channels”. These include:

  • Stock Connect (launched in 2014 to allow investors with a presence in Hong Kong to access mainland China stock markets);
  • The consolidated Qualified Foreign Institutional Investor (QFII)/Renminbi Qualified Foreign Institutional Investor (RQFII) regime;
  • Bond Connect (a mutual market access scheme for investors from mainland China and overseas to trade in each other’s bond markets); and
  • The China Interbank Bond Market, China’s largest domestic bond market and the world’s second largest

Chinese equities have been the biggest beneficiaries of foreign investor flows. On 8 February, the Financial Times reported that foreign purchases of Shanghai- and Shenzhen-listed shares through Hong Kong’s Stock Connect programme had “rocketed to renminbi (RMB) 141bn (US$21bn) so far in 2023 — more than double the previous record for the same period in 2021”.2 However, the FT later highlighted on 3 May that foreign inflows into Shanghai/Shenzen-listed equities have slowed substantially, amid escalating geopolitical tensions between the US and China.3

While foreign investor appetite for Chinese equities has been steady, the country’s US$21trn bond market has suffered sizeable outflows. According to Bloomberg, foreign holdings of Chinese bonds fell in January 2023 by RMB 106.5bn (US$15.5bn) to RMB3.28trn, owing to the growing yield discount on China 10-year bonds versus similar maturity US treasuries.4 However, experts believe flows into RMB bonds could resume later this year if yields rise off the back of inflation and economic growth.5

China’s regulator has also given its approval to Swap Connect – a scheme modelled on Bond Connect and Stock Connect, which will offer offshore investors access to the US$51trn onshore interest rate swaps market – a move that could help counteract some of the RMB debt outflows.6

As for the supply of securities, Deutsche Bank Research’s Linan Liu noted in Asia Corporate Newsletter Q2 2023 that, “credit growth during Jan–Feb was primarily in RMB loans, while direct market financing (bonds and IPOs) is yet to recover” (see Figure 1).

Figure 1: China’s credit growth, Jan–Feb 2023 (RMBbn)

Figure 1: China’s credit growth, Jan–Feb 2023 (RMBbn)

Source: Asia Corporate Newsletter Q2 2023, Deutsche Bank Research

Liu adds, “We also see progress on debt restructuring deals for defaulted developers, a friendlier regulatory environment for the private sector (note the latest reorganisation plan of a large platform company, with potentially more to follow), the launch of registration-based IPOs and the expansion of the Stock Connect Scheme to more eligible stocks. We thus expect both the RMB credit market and After Hours (A-H) equity market to become key sources of financing for corporates in China.” By way of background H-shares are more liquid as they can be traded by foreign investors.

In addition to global investors building up exposures to mainland China and a sharpening appetite for capital raising from Chinese corporates, there has also been a surge in the number of Chinese institutions investing overseas through the Qualified Domestic Institutional Investor (QDII) scheme, as they look to diversify their revenue streams outside of the local market. The number of QDII quotas issued by the State Administration of Foreign Exchange (SAFE) now totals US$162.7bn (as of March 2023) spread across 38 banks, 71 securities companies, 47 insurers, and 23 trusts.7 This is a notable increase from 2020, when SAFE issued US$116.7bn in QDII quotas.8

“The Chinese regulators want greater diversification in the fund management space”
Ben Li, Head of Securities Services for China at Deutsche Bank

New mainland investors

Following the introduction of various liberalising measures – including the Wholly Owned Foreign Enterprise Private Fund Management (WOFE PFM) programme, the Qualified Domestic Limited Partnership (QDLP) and Wealth Management Connect, foreign fund managers can now distribute their products to a select number of Chinese investors. A handful of foreign asset managers – including Schroders, BlackRock and Fidelity – have gained approval from the China Securities Regulatory Commission (CSRC) to operate onshore mutual fund businesses.9 As at May 2023, eight foreign names have been approved to offer mutual fund businesses in China.

“The Chinese regulators want greater diversification in the fund management space. The investment style adopted by most Chinese managers is broadly similar. Introducing global asset managers with different investment philosophies, governance, risk controls and products will help bring about diversification,” according to Ben Li, Head of Securities Services for China at Deutsche Bank. Meanwhile, Deutsche Bank’s Chao believes that “an influx of leading global asset managers will not only stimulate competition within China, but it could also help the local funds industry upskill and embrace global best practices”.

For global asset managers, Chao explains, “the Chinese investor market is largely untapped, making it a very attractive proposition for them”. He continues, “A number of the major Chinese insurance companies have worked with global fund managers for some time now. Those asset managers are now looking to offer their services to more domestic institutions, including the country’s fast growing pensions industry.”

Aside from large institutions, there are also a lot of family offices, high net worth individuals (HNWI) and mass affluent investors, sitting on vast amounts of bank deposits. In the Guangdong, Hong Kong, Macau Greater China Bay Area, there are approximately 450,000 HNW families, with investable assets totalling RMB2.7trn (US$375bn).10 “These investors want to diversify outside of China and allocate offshore,” says Li. Consequentially, it is highly likely that the number of foreign managers looking to distribute in China will increase moving forward.

Similarly, China’s domestic funds industry is also undergoing significant growth. The assets under management (AUM) controlled by the members of the Asset Management Association of China (AMAC) was estimated to be RMB 68trn (US$10.79trn) at year-end 2021,11 versus RMB 56.17trn in 2020.12 According to EY, China is now the fourth largest asset management market in the world after the US, Luxembourg and Ireland, and the second biggest onshore market after the US.13 “Chinese asset managers are increasingly looking to raise money from investors based outside of the mainland, namely in Asia ex-China, Western Europe and North America,” highlights Chao.

Lingering concerns

Asset managers, which are either investing into China or distributing their fund products to local allocators, will often face various impediments when doing so. Although Chinese regulators have made it much easier for foreign institutions to operate in the domestic market, Chao said there are still some lingering issues. “A number of global asset managers – especially those in the US – are concerned about the geopolitical risks and the potential for exchange controls being introduced. Operating in multiple locations in China can be quite complicated from a tax and regulatory perspective, as different provinces will often adopt their own tax rates and regulations,” adds Chao.

In a country where local institutions have a distinct domestic bias when investing, global asset managers can sometimes find China a difficult market to penetrate. “Chinese funds will typically compete with each other on price. Unless a foreign manager offers higher returns and a lower risk profile than local providers, it can be very challenging for firms to differentiate themselves” he reflects.

Another barrier is that global asset managers – even the high-profile ones – often lack the brand recognition in China which they might have elsewhere. This is a problem, especially as a Broadridge study revealed that brand recognition is one of the top three criteria for Chinese fund selectors when making their asset allocations.14 “In order to overcome this lack of brand awareness, foreign asset managers need to use the right type of distribution partners, and demonstrate to local clients that they are committed to the market,” says Li. As such, successful fundraising in China requires patience, a local presence and major investment by global asset managers.

Advantages of a Chinese fund custody licence

In 2020, Deutsche Bank received a fund custody licence from CSRC enabling it to provide an array of post-trade solutions for funds established within China, including wholly owned foreign enterprises (WFOEs) and the domestic asset management industry, but also foreign institutions looking to trade in China.

“Through its local custody licence in China, Deutsche Bank can help offshore institutions access both domestic investors and investment products,” explains Chao. In a market where regulations are complex and prone to changes, institutions are turning to custodians who not only have an entrenched local presence but are equipped with the right expertise and knowledge to help them navigate the challenges synonymous with operating onshore.

“At the same time, the licence has helped us gain invaluable insights into how the domestic asset management industry works, in terms of the precise nature of the fund products being manufactured for local investors, together with their servicing requirements, many of which are very different to what we are accustomed to outside of China,” adds Chao.

Despite offering traditional custody, Li maintains that Deutsche Bank’s model in China is unique. “It allows local investors to build up exposures to offshore markets more efficiently. Previously, local fund managers had to appoint a local custodian bank, which would select an international custodian offshore to support them with settlement activities. Deutsche Bank – through its fund custody licence – can offer a one- stop shop solution for clients.

“With the local fund custody licence, we can work with domestic managers, while the offshore branch helps them invest overseas by supporting them with clearing and settlement,” explains Li. Custody provision acts as a platform to connect service provision to other core businesses and functions; in particular treasury, cash management, FX and markets “to provide a holistic capital market solutions to clients”, as he puts it.

Local financial institutions (particularly fund management companies and trusts) seem to have responded well – in 2022 more than 40 new custody accounts were opened with Deutsche Bank China, reports Li. In addition, the local custody licence also provides foreign fund houses that operate in China with a custody solution embedding the same level of global service standard they are used to in the offshore market. This has generated a growing level of partnership enquiries.


1 See China Macro: Shifting growth (18 April), by Yi Xiong and Deyun Yu, Deutsche Bank Research
2 See ft.com
3 See ft.com
4 See bloomberg.com
5 See bloomberg.com
6 See ft.com
7 See safe.gov.cn
8 See fundselectorasia.com
9 See regulationasia.com
10 See deloitte.com
11 See assets.ey.com
12 See db.com
13 See assets.ey.com
14 See fundselectorasia.com


Tony Chao

Head of Securities Services, Greater China at Deutsche Bank

Ben Li, Head of Securities Services for China at Deutsche Bank

Ben Li

Head of Securities Services for China at Deutsche Bank

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