Articles and news

Back to Insights

Ripple effect widens for China investors

It is not only Chinese mainland shares which are now attracting investor attention.

Over the past few years, the relevance of shares quoted on the mainland Chinese stock exchanges to global investors has grown considerably. China has opened access to its share markets via the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock connect schemes.

As we looked at last month, major stock market indices, notably the MSCI Global Emerging Markets Index, have started to include mainland shares, whereas previously China was only represented by companies listed outside the country. As the proportion of mainland shares in the indices rises, so will the weight of money heading towards the Middle Kingdom.

Another major investment sector started to gain a Chinese component from the beginning of April: the fixed interest (bond) market. One of the main, if not the main, global bond indices, the Bloomberg Barclays Global Aggregate Index, began a process of adding mainland Chinese fixed interest securities. By the end of November 2020, the index will have a 6% weighting in Chinese bonds, issued by either the Chinese government or one of the three ‘policy banks’ it controls. At the end of the process the Chinese currency, the Renminbi (sometimes called the Yuan), will be the fourth largest currency component in the index.

The mainland Chinese bond market is the world’s third largest after the US and Japan, at US$13,000bn, about 10 times the size of the offshore Chinese bond market. However, it is thought that at present foreign investors own only about 2% of onshore bonds. One reason for that low holding is that, until recently, it has been difficult for overseas investors to buy mainland bonds. That started to change in 2016 and the arrival in 2017 of Hong Kong Bond Connect (the bond equivalent of the equity market links) prompted a sharp rise in foreign purchases.

The 2018/19 inflow to VCTs is somewhat surprising as those 2017 Budget changes have made fresh investment by VCT managers higher risk than it used to be. The focus is now firmly on young growth companies, which may need a series of capital injections as they expand, rather than a one-off investment. For now, the impact on returns have benefited from established VCTs raising funds for some years and thus have portfolios built up under past, less restrictive VCT investment rules.

These VCTs may still hold investments in management buyouts and long-established companies that required capital for expansion. As those old holdings are liquidated, performance could become more volatile, reflecting the higher risk nature of the more recent acquisitions.

The attraction of VCTs, which must be set against those risks, is tax relief:

  • 30% income tax relief (given as a credit) is available on up to £200,000 of investment per tax year;
  • dividends are free of income tax; and
  • any gains are free of tax, although income tax is clawed back on disposals within the first five years.

If your opportunity to invest in pensions is limited by the annual and/or lifetime allowances, that 30% up front tax relief has an obvious attraction.

Although the end of tax year VCT season is over, there are a range of VCTs seeking to raise funds early in the new tax year. Please contact us to discuss your options.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Source: Contentplus May 2019