Considering Chinese assets: A valuable portfolio building block?

China is one of the world’s most dynamic economies and, measured in many ways, its importance on the global stage is expanding. Since its accession to World Trade Organisation status in the mid-1990s, China has been integrated in global trade and progress towards ‘opening up’ China’s onshore financial markets to international investors has been deliberate and cautious over the past seven years. The liberalisation of China’s capital account means that today, international institutional investors have the chance to access a new set of financial assets that were not previously part of their opportunity set.

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Size of the onshore markets and their accessibility to foreigners (USD tri)

Source: MSCI, Bloomberg LP, Willis Towers Watson

Size of the onshore markets and their accessibility to foreigners (USD tri)

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Size of the onshore markets and their accessibility to foreigners (USD tri)

Source: MSCI, Bloomberg LP, Willis Towers Watson

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Whilst there are many merits to introducing Chinese assets to a portfolio, like with all investment strategy decisions, these should be considered alongside the associated risks. We believe that Chinese assets offer compelling diversification benefits given their low correlation to developed markets and, similar to their global counterparts, should offer a reasonable set of risk premia, conditioned on pricing at any point in time.

Nevertheless, it is crucial for investors to consider these benefits alongside the risks to Chinese asset returns which we view as falling into two broad categories: economic/financial and political (of which sustainability-related risks fall into both). The former can be somewhat mitigated through asset diversification however political risks are much more difficult to quantify and avoid.

Willis Towers Watson are working on several solutions that will allow investors with differing beliefs and governance capabilities to invest in a diversified portfolio of Chinese assets. These solutions cover both active and beta options and are all structured with our best in class philosophy in mind. Ultimately, we believe that Chinese assets should become one of the building blocks within client portfolios and investors should not overlook the compelling benefits they can provide to help them reach their investment goals.