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The next mile: Smoothing the path for foreign investors accessing China


To the point


While many barriers to foreign investment have been removed in China, market friction persists. The BNY Mellon report, surveying 300 global asset owners and managers, finds that:

  • Most foreign investors plan to increase China equity (80%) and bond (81%) allocations over the next 2 years, with 63% likely to invest in private equity over the same period.
  • Long-term foreign investors embrace a mix of onshore and offshore access schemes to flexibly pursue their investment goals.
  • Collateral management and trade settlement mechanisms still create operational challenges for foreign investors. While regulatory changes cannot immediately eliminate friction, service providers offer investors greater flexibility.
  • Foreign investors look to regulators to harmonize foreign exchange (FX) and funding models across China’s access schemes.
  • Forty-nine percent of asset managers say a lack of data makes it challenging to define the China securities to include in sustainable funds. Nevertheless, asset managers embrace new ESG products by conducting proprietary analysis to supplement information from data vendors. 


While China has enjoyed a meteoric rise to become the world’s second-largest economy, foreign participation in its capital markets has not kept pace.

However, rapidly changing conditions are prompting foreign investors to look again. The government’s efforts to open up market access, the inclusion of Chinese bonds and equities in major global indices, and economic growth that still outstrips those of developed markets1  have seen Chinese assets’ proportions growing on many investors’ portfolios. With many barriers removed, foreign investors’ access to China’s capital markets is easier than a decade ago.

Nevertheless, market friction persists due to a lack of harmonization across access schemes, complex local infrastructure, limitations on sophisticated investment instruments, and post-trade processes falling short of international best practices. Regulatory reforms and market-led solutions comprise the “next mile” of steps to boost the expansion of investors’ China portfolios—although external factors like potential shifts in US-China relations may influence how quickly foreign investors grow their allocations.

BNY Mellon’s latest survey finds that 80% of global asset managers and owners intend to increase their China equity and bond allocations over the next 2 years. However, as they scale up their portfolios and explore a broader range of investments, they must overcome these market access and operational challenges.

Investors are wading in but picking their sectors

Most survey respondents intend to grow their China allocations, albeit cautiously. For example, 74% will increase their China equity holdings at the same pace or slower than the rate at which global equity indices increase their China weightings, and 63% say the same for China bonds. Only 6% will increase equity allocations faster than the rate of increase in mainstream index weightings to China, and 18% for bond allocations.

Foreign investors seeking private equity opportunities appear discerning in their investment sector selection. More than half the survey respondents will focus on consumer and retail (56%), while technology, media and telecommunications (49%) and healthcare (48%) will also gain traction.

Which industry sectors are of greatest interest for foreign investors’ private equity investments in China over the next two years?


Figure 1: Foreign investors will be discerning about their private equity allocations

Progress on three key issues will influence future allocation decisions

Foreign investors identified three main factors that will most impact their China investments over the next 2 years: (i) whether capital market rules further align with international norms, (ii) regulatory risk, and (iii) ESG disclosures and standards progress.   

Market access agility

As asset owners diversify their China portfolios and asset managers increase their fund offerings, flexibility is critical to their access scheme selection. Access to a broader range of Chinese equities and bonds is the top criterion of survey respondents (46%) when selecting access schemes.

Interestingly, institutions investing directly in China for the longest period (4 years or more) are most likely to increase their use of both offshore (65%) and onshore access schemes (62%) over the next 2 years. This reflects the need for institutions with more sophisticated China strategies to use multiple schemes to build their exposures.

Harmonization must be the goal

When asked which measures they want Chinese regulators to prioritize over the next 2 years, harmonization of FX and funding models across access schemes came top, followed by reforms enabling block trading for Stock Connect and aligning investment scope across different schemes.

What measures would you like to see China`s regulators prioritize over the next two years?


Figure 2: Foreign investors want China’s regulators to prioritize greater harmonization of market access schemes

Foreign investors want a standard FX model for all access schemes across onshore and offshore markets, but onshore CNY FX dealings are restricted. For example, investors can only appoint one FX bank for the QFI scheme, and switching between CNY and CNH for the China Interbank Bond Market (CIBM Direct) scheme is also restricted. Such constraints mean that onshore and offshore accounts must be segregated.

Removing friction as sophistication grows

As foreign investors’ China allocations grow, so does their interest in more sophisticated approaches to managing liquidity and maximizing returns. However, some barriers remain.

A way forward for SBL

Our survey shows strong interest in participating in SBL in China, particularly among North American asset owners.

While asset owners see opportunities to add value to their China portfolios through securities lending, the current market infrastructure is not ideal. There are concerns about the China Securities Finance Corporation’s (CSFC) status as the central counterparty, and the lack of a sophisticated agent lender infrastructure and providers offering indemnification to reduce counterparty risk.

Positive change may be forthcoming. Industry trade associations like ASIFMA and PASLA are working closely with Chinese regulators and exchanges to increase the use of the QFI stock-borrowing facility.

In addition, last year, the People’s Bank of China announced new measures to regulate bond borrowing and lending in the CIBM to increase market liquidity and protect market participants’ rights and interests.

There is also a gradual uptake of mechanisms enabling Stock Connect and Bond Connect listed securities to be used as collateral under a pledge structure, as CSFC rules dictate. This paves the way for greater use of these assets in securities finance transactions.


Time to unlock the benefits of collateral management

To keep growing their China exposures, foreign investors need to maximize these securities’ utility. The ability to use Chinese stocks and bonds as collateral to finance trading activity will be increasingly important; however, participation remains limited. One reason is the operational complexity involved.

From an onshore perspective, there are limited options for the use of collateral, and only available through the Shanghai Clearing House (SCH) and China Central Depository & Clearing (CCDC). This creates inefficiencies when investors seek to post collateral and manage their positions. Another challenge is the ambiguity in the legal rules governing defaults. Moreover, processes deviate from international best practices, producing concerns about how a default scenario would be managed.

Investors using offshore access schemes have some alternatives. Some global triparty agents offer Stock Connect and Bond Connect solutions, allowing clients to use these assets for certain collateral purposes.

The advantages of operational efficiency and liquidity and in reducing credit, market and settlement risks make collateral management attractive. If regulations ease the use of collateral per international best practices, greater participation is likely. 

Fast-tracking ESG integration

The inability to obtain ESG data for compliance and reporting in their home countries was investors’ top concern about integrating ESG criteria into their China portfolios. Foreign investors from Europe and North America face mounting demands from their home regulators and clients to invest responsibly.

Other concerns are that limited ESG disclosures from Chinese equity and bond issuers may expose investors to hidden investment risk, and the number of issuers meeting their ESG criteria may limit the investable universe.

Asset managers forge a path

Well-resourced foreign investors are not allowing current disclosure limitations to hold back their ESG ambitions. They are undertaking a significant amount of proprietary analysis to supplement available data and ratings from ESG data vendors.

Read BNY Mellon's disclaimer for more information about this content:

1 International Monetary Fund real GDP growth forecasts for 2022.




If China continues to open up its market to foreign investments, there is room to increase investors’ China allocations.

But for foreign investors to accelerate the scaling of their portfolios, Chinese regulators must further harmonize access schemes, enable access to a wider Chinese investment universe, embrace more complex instruments, and fully integrate ESG considerations.

The industry should also explore approaches and adopt global best practices and standards to overcome these challenges, such as:

  • Working with service providers and the industry to accelerate market entry and employ digital tools and international standards to improve market efficiency and the settlement ecosystem;
  • Embracing securities financing and triparty solutions in collateral management to optimize returns and enhance liquidity; and
  • Adopting ESG data analytics platforms to overcome disclosure gaps by aggregating many data sources and optimizing investment and reporting processes.

Our survey shows foreign investors are ready to expand their portfolios if the remaining friction points are addressed. Continued efforts will support the scalability of services, drive efficiency and optimize investment decisions, while investors must stay agile to navigate today’s uncertain geopolitical and macroeconomic landscape.