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21st Century Business Herald reporter Li Yuchen reports from Beijing

After 20 years of trials and tribulations, China's capital market has implemented both "bringing in" and "going out" policies and measures, with remarkable results. Since the official launch of my country's QFII system in 2002, the continuous entry of QFII institutions has become the most vivid reflection of the increasing attention of foreign capital to Chinese assets.

According to the data from the China Securities Regulatory Commission, by the end of May 2024, there were 832 QFII institutions in the market, of which 29 were newly added this year. From the outside to the inside, a number of overseas institutions are still accelerating their layout in the Chinese market; from the inside to the outside, the pace of business "going overseas" of domestic managers is also accelerating. Deepening the QFII investment advisory business is becoming the choice of many institutions to build a differentiated and characteristic development path.

Today, Chinese domestic public fund companies not only serve as managers trusted by overseas funds, but also become the "outposts" leading them to approach and understand China. In order to eliminate the unfamiliarity, misunderstanding or prejudice of overseas investors against the Chinese market, a number of public fund institutions have carried out long-term and extensive investment education work for overseas investors in terms of the openness, convenience, diversity of listed companies and growth potential of the Chinese market.

What are the preferences and confidence of different types of overseas funds in Chinese assets? And what are the ways to help fund managers better tell the Chinese story to them? Recently, Xu Lirong, general manager of Franklin Templeton Investments, Sealand, was interviewed by a reporter from 21st Century Business Herald and shared many thoughts of Franklin Templeton Investments in developing international business and drawing a blueprint for Chinese investment for overseas clients.

Since providing investment services for a Middle Eastern sovereign fund for the first time in 2012, Franklin Templeton Sealand Fund Management has been vigorously developing its international business and looking for overseas investors to invest in Chinese assets. Currently, the company's service types span across different fields such as A shares and RMB bonds, and its service clients come from the Middle East, Europe, Africa, Southeast Asia, Hong Kong, China, etc.

“Overseas long-term money” may continue to flow in over the next five years

What are we talking about when we talk about “overseas funds”?Although the domestic market often uses the term "overseas funds" or "overseas long money" to describe foreign investors, Xu Lirong told reporters that the composition of overseas clients investing in the Chinese market is actually more complex and can be roughly divided into four categories.

The first type of overseas investors are usually large sovereign funds, central bank funds or large-scale annuities. The "overseas long money" often mentioned in China usually refers to this category.

In Xu Lirong's view, the biggest feature of this type of overseas funds is the long-term nature of asset allocation. Although it may take a long time to form an asset allocation view, once the decision is made, the time dimension of its investment is basically 5 years, and some even reach more than 10 years, and will not be transferred due to short-term risk events. It can be said to be "long money" and "patient capital" in the true sense.

The second common type of investor is overseas public funds, which involve investments in the Chinese market and mainly include emerging market funds, regional and global allocation funds, etc. Unlike sovereign funds, the inflow and outflow of public funds in specific markets are mainly investment-oriented, and their portfolio adjustments are more restricted by the individual styles of fund managers, public institutions and the countries where they are located.

"For example, when the U.S. stock market is strong, global funds must make adjustments in order to outperform their peers, so their overall positions in emerging markets such as China are relatively low," said Xu Lirong. "But the increase or decrease in holdings of this type of funds is actually weakly correlated with overseas investors' bullish or bearish views on China, so we don't need to over-interpret it."

In addition, overseas participants in the Chinese market also include hedge funds and other overseas investors. Due to the high flexibility and profit orientation of hedge funds, their trading behavior is often short-term, volatile, and with small information gaps. Other overseas investors are mainly small-scale pension funds, family offices, and large foreign banks, such as HSBC and Deutsche Bank, whose distinctive fund attributes bring different configuration needs.

At this point in time, Xu Lirong predicts that "large, long-term money" such as sovereign funds will show a unilateral inflow trend of steady or even phased acceleration in the next five years, and will become the foundation for the increase in overseas funds invested in China for a period of time.From a regional perspective, Asia and Africa, led by the Middle East, will be the core source of such "big money". Countries such as Europe still have geopolitical concerns about investing in China, but they have also generally shown recognition of China's economic opportunities.

Foreign public funds are more like "potential reservoirs". Due to the pressure of assessment, rising stock prices are the "hard truth" to attract such funds, and the specific inflow time still depends on the style of the fund manager. However, in the long run, the continuous upward performance of China's market economy may also "build a nest to attract the phoenix", and increase the attractiveness of such funds.

In addition, the high trading frequency of hedge funds often makes them isolated from long-term investors. At the same time, according to Xu Lirong's observation, the layout of most family office funds in China is still in the stage of going from 0 to 1, from nothing to something. However, as the demand for non-US dollar assets of this type of assets continues to grow, there may be an inflow trend to China in the next few years.

Bringing foreign investment closer to the real China

Can foreign investors fully learn Chinese local thinking and make investments based on a full understanding of the changes and evolution of China's political and economic relations? Even with the help of Chinese public fund managers, the answer is probably "not easy".

However, differences in perceptions do not necessarily become an obstacle for overseas investors to invest in the Chinese market. In fact, through communication with overseas clients, Xu Lirong realized that fund managers do not need to make themselves or their clients become "macroeconomists" in China.

"Ultimately, everything we show our overseas customers must return to objective figures and the specific perception of overseas investors about China's economic growth," he pointed out to reporters.

When it comes to the investment advantages of the Chinese market, the core of what Xu Lirong and foreign investors tell us is often very simple: first, objective data shows that A-shares are currently in an oversold state and have investment value; second, the low correlation between the Chinese market and the global capital market far exceeds that of India, Japan and other markets, which can provide investors with better risk diversification opportunities; third, as RMB assets are increasingly becoming part of the reserve currency and trading currency, foreign capital should timely enhance its consideration of China's asset allocation.

In terms of communication strategy, using certain techniques to "tell the China story well" can also bring overseas investors one step closer to the real China.

"When facing overseas investors, we must first be honest and secondly, we must be able to think from their perspective." Xu Lirong told reporters, "Some clients' questions may sound offensive, but from their perspective, it may be natural to ask such questions. We must understand the essence of the problem and not develop a confrontational mentality."

At the same time, rather than trying to change investors' cognitive framework, starting from a more general common sense perspective, through horizontal and vertical analogies, allowing overseas investors to spontaneously form judgments is often more persuasive and has a more significant impact on investment decisions.

Regarding some specific concerns of foreign investors, Xu Lirong always believes that some "bottom-up" examples can help them understand China more easily. "For example, the private economy is often a concern of overseas investors. I often give them an example that many listed companies in our investment portfolio insisted on building factories and expanding markets abroad even during the epidemic. This is China's entrepreneurial spirit and the source of China's economic growth." He said.

In terms of communication, Xu Lirong also emphasizes the importance of "on-site". On the one hand, she often leads the team to conduct overseas on-site roadshows in person, and on the other hand, she often invites overseas investors to come to China to conduct on-site research and work with the team of Franklin Templeton Sealand Funds. From the actual results, many investors have greatly improved their attitude towards the Chinese market after visiting China.

"Two or three months ago, a client from a European family office just came to China. He was originally pessimistic about China's economy, but after visiting cities such as Beijing, Shanghai and Guangzhou, he said that his views on the Chinese market had changed a lot and he would consider increasing his allocation in the future," he gave an example.

Looking ahead, Xu Lirong said that the main trend of the Chinese market this year may be "mean reversion", that is, excessive pessimism is being corrected. Whether this trend can continue depends on whether the economic fundamentals can stabilize and enable companies to see an upward profit.

From the perspective of sector allocation, Xu Lirong believes in the regularity of "oversold rebound". He predicts that whether it is traditional consumption, new energy, finance, TMT or cyclical industries, they are likely to perform well. In the long run, based on changes in industry fundamentals, consumption, automobiles and cyclical industries may be more sustainable.