Fidelity’s Yeung: China will attract foreign investors but volatility remains

The decision of Chinese regulators to stop intervening in the equity market and concentrate on opening up capital markets will attract more foreign investors, says Fidelity Worldwide Investment director Catherine Yeung.

Yeung says a key aim of the Chinese government is to open up their capital markets, including the currency and local government bond markets. The country also wants to enhance and develop the bond market itself, she adds.

Over the past months, Chinese authorities have increasingly facilitated access to the domestic capital market for foreign investors, including the approval of a fund program in July, which enables Chinese asset-management firms to sell their products directly to offshore investors, while giving their foreign counterparts direct access to the Chinese market.

Yeung says: “The fact that the market is finding its natural level should then see some value investors or foreign investors coming in, because again by opening up of the capital markets ideally the government wants to diversify the investor make-up of its equity market.

“They have announced they are not intervening because a lot of the domestic investors have now exited the market.”

Although overall sentiment is weak on China, Yeung believes there are still opportunities for investors.

She says: “Not only are there some good opportunities in terms of volatility from a long term investment horizon but also the rise of the Chinese consumer story is still very much intact in terms of mass market consumption and behaviour. This scene can play into consumer discretionary names, staple names, and insurance names.”

Although Yeung expects third quarter growth to be slower than second quarter growth “given the drag from some of the financial markets”, she doesn’t think the equity market correction will have a significant impact on Chinese investors.

She says: “We can’t forget there is only a relative small proportion of the overall population in China that are exposed to the equity market and some of the equity market corrections are signs of a pick up in the property market.”

However, Yeung warns investors to expect further volatility over the next month. 

She says: “The market is pricing a further easing both to the interest rates as well as the reserve requirement ratio. Fiscal news flow is also going to be important.

“Finally, expect more financial market reforms as well as the opening of capital markets because China no longer can rely on its traditional banking sector, it needs to grow given where it is in the cycle.”