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Greater exposure to China assets offers growth, diversification benefits: UBS

Incorporating Chinese assets into global portfolios can provide both growth potential and meaningful diversification benefits, said UBS Global Wealth Management on Tuesday.

Global index provider FTSE Russell’s confirmation to include Chinese government bonds into FTSE World Government Bond Index (WGBI) and its derived indexes on Monday is long expected and is the latest illustration of the increasing maturity of China’s financial markets, said UBS Global Wealth Management in a research note.

FTSE Russell said the inclusion would occur over a period of 36 months commencing with an effective date of Oct. 29, 2021 and “ongoing reforms to the Chinese government bond market warrant inclusion in the WGBI.”

Many global investors are significantly under-allocated to China relative to its weight in global benchmarks, whether because of insufficient understanding of the investment opportunity and market complexity, or other factors, said UBS.

UBS said investors should “consider their exposure to China,” given China’s size, uniqueness, increasing maturity and diversification benefits.

“China has become too big and distinct for global investors to ignore,” with its economy accounting for about 20 percent of global total economic output and 30 percent of annual global gross domestic product (GDP) growth, said UBS.

China’s equity market capitalization contributes to 11 percent of global equity market capitalization and the country is becoming a leader in technology, innovation and sustainability, it said.

“Some sectors exposed to China’s digital economy offer a 20-40 percent compound annual growth rate over the medium term,” said UBS, adding that Chinese financial markets are maturing, which makes it easier for China to access investment opportunities.

China’s inclusion in global bond indexes “will eventually draw billions of dollars worth of incremental foreign inflows into the country,” said UBS, noting foreign ownership of China’s overall onshore fixed income market at around 3 percent.

There’s room for foreign ownership of Chinese government bonds, policy bank bonds and credit bonds to rise further, according to UBS.

China has also made it easier in recent years for global investors to gain access to the full set of Chinese equities, and foreign investors can get exposure to offshore equities and American Depository Receipts through buying either individual stocks or funds, according to the Swiss financial giant, which has big presence in China.

With the steady progress of financial reforms and the opening of the market, RMB assets are showing strong resilience and certain hedging characteristics and their attractiveness continues to rise, FTSE Russell quoted Pan Gongsheng, deputy head of the People’s Bank of China, as saying.

International investors are expected to add their exposure to Chinese assets following the inclusion of Chinese bonds or stocks into major indexes gradually.

“Investing in China offers a diversification benefit for global investors,” said UBS.
Source: Xinhua

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