Big Growth Potential As Institutional Funds Hold Tiny Share Of Chinese GDP - Invesco

Tom Burroughes

19 November 2012

Institutional investors such as pension schemes have huge upside potential in driving the growth of China’s financial markets as they currently account for a puny share of gross domestic product, according to Invesco in a survey of trends in the Asian giant.

As wealth managers seek to work out the implications of last week’s new China leadership after the once-in-a-decade Communist Party Congress, one issue that arises is the relatively immature nature of China’s own investment market, even though the country has made big strides in recent years.

“Encouraging greater institutional participation in domestic equity markets is a key component of an intensifying effort to develop China’s stock and bond markets in order to make them an efficient source of long-term financing for corporates,” Annabel Betz, client portfolio director, Invesco, said in a note.

Chinese pension assets make up just 6.25 per cent of GDP, which compares with 107 per cent in the US, 101 per cent in the UK and 55 per cent in Japan. (The note did not explain how such countries’ shares exceeded 100 per cent, however.) Equally, allocation to equities is low, the note said: Chinese pension funds hold only 9.9 per cent of their assets in stocks, while in the US, the share is 41 per cent. A part of the reason for this low participation is restrictions on how Chinese funds can invest. To put some of these points into perspective, the Shanghai stock market had a total market capitalisation at the end of 2011 of around $2.3 trillion (source: World Federation of Exchanges.)

The report comes at a time when China is expected to encourage greater foreign participation in markets as the Asian country seeks to re-balance its economy away from an export-led focus. As reported by WealthBriefingAsia recently, data shows a record level of investment quotas being issued to foreign firms. (To view that story, click here.)

Ageing and labour participation

Betz’s note points out that as China’s population ages over the next 10 to 15 years, this will squeeze the pool of available labour among the unskilled segment and put pressure on the country to spend on education and skills training to boost productivity, while it will also drive spending on health and research to deal with issues of old age.

Citing United Nations figures, Betz noted that in 1980 there were almost seven people under the age of 15 to every person over the age of 65. By the middle of this century, people aged over 65 will make up more than 25 per cent of the total population, from just 5 per cent in 1980 – a surge of 280 million people.

Besides healthcare and insurance, another sector likely to benefit from an ageing population, Invesco says, is the leisure and recreation field as retirees travel abroad or seek recreational outlets at home.