Investors looking to add to their Chinese exposure as it moves towards overhauling the US as the largest economy in the world shouldn’t be put off short-term distractions, according to Matthew Asia’s Robert Horrocks and Jonathan Schuman.
Chinese equities are likely to play an increasingly important part in investor portfolios given their greater inclusion in popular benchmark, such as the MSCI Emerging Markets index.
Currently a lot of exposure to Chinese equities comes via global emerging market equity instruments, rather than a dedicated investment, said Jonathan Schuman, head of global business development at Matthews Asia.
But this might no longer be suitable for investors wanting to add exposure to one of the fastest-growing global markets.
Despite a recent slowdown in China it is still projected to overtake the US as the largest global economy by 2030.
And a recent global poll of 150 professional and institutional investors globally carried out by Greenwich Associates in collaboration with Matthews Asia, almost a third of European investors planned to increase their holdings in Chinese equities.
Current Exposure to China
Source: Greenwich Associates, Matthews Asia
Expected European fund flows into China
Source: Greenwich Associates, Matthews Asia
“There is clearly some growing recognition of the current underweight to China that people have in their portfolios and an idea that they would like to increase their exposure to the Chinese economy,” said Schuman (pictured). 
While the main way for investors to gain cheap exposure to the Chinese market has been through index investment, there does seem to be a growing appetite for active strategies.
“The majority are looking at China for diversification purposes, and as a long-term strategic allocation,” said Robert Horrocks, chief investment officer of Matthews Asia.
“And, in a world that has been recently dominated by discussions of flows to passive investments, more than three-quarters view China as a place where they want to access active management, rather than passive management.
“This is a little bit counter to the broader trends that we’ve been seeing, particularly in developed markets.”
Chinese authorities, said Horrocks, have been successful in delivering GDP growth and profit growth in recent years, making it a “number one policy priority”, but the prospect of a burgeoning US-China trade war has dampened investor sentiment towards the country more recently.
However, the Matthews Asia investment chief said that investors should not worry too much about the potential impact on China as it is likely to have broader implications for the US.
“When the US tries to use trade to contain China, all it’s doing is building up walls around itself,” said Horrocks, who believes alternative trade routes will open up and are likely to lead to China.
“All of these poor countries reach out and say, ‘we want to be part of global commerce, global economic development’ and China is building the roads and the railways that allow those countries to gain access to these big markets,” said Horrocks (pictured). 
Notwithstanding the US-China trade war, there have been other concerns voiced by investors, but these, too, might be overdone.
Horrocks said for European investors one of the main concerns is the ESG – environmental, social & governance – aspect of investment, particularly around transparency of governance.
According to the study, three-quarters of the respondents said that the Chinese corporate governance standard was their main concern, followed by market access, while geopolitical risk ranked third.
But Horrocks said corporate governance concerns are just “easy issues to hang your hat on,” when they have not done the diligence of going through the shares closely.
If they did, said the manager, then they would find that Chinese A-shares are “actually pretty transparent,” as companies must produce very detailed plans on cash flows and raising capital.
Horrocks is a co-manager on the $258.4m Matthews Asia Dividend and the $77.4m five Crown rated Matthews Asia ex Japan Dividend funds.
Performance of funds over 3yrs
Source: FE Analytics
The Matthews Asia ex Japan Dividend has made a total return of 40.85 per cent over the past three years, while the Matthews Asia Dividend is up by 22.31 per cent over the same period.