Over the past decade, China’s economic development, securities-market evolution and technological advances have attracted international investors to Chinese assets. Since the outbreak of the COVID-19 pandemic, however, international investors have become more cautious about the market and geopolitical risks of investing in China. For example, how could China’s future growth be affected by changes in the global supply chain via nearshoring and reshoring strategies? The shift comes despite the recent success for some managers of dedicated China portfolios. Meanwhile, many Chinese companies’ efforts to expand their global presence and the investment implications of that effort have often been overlooked.
Investors domiciled in China who would like to enhance their global diversification are able to directly invest in international markets through programs such as the Qualified Domestic Institutional Investor (QDII) scheme or Stock Connect, but both options come with inherent limitations.[1] Another approach is to invest in Chinese companies with a notable proportion of their operations, supply chains or revenue in overseas markets. Using MSCI Economic Exposure data, we explore the potential opportunities and risks associated with this avenue.
China’s “bring-in” and “go-global” policies
China’s “opening up” policy that began in 2000 has encompassed both so-called bring-in and go-global strategies that aim to attract foreign inbound investment as well as encourage the country’s domestic enterprises to invest overseas.[2] The growth in foreign direct investment (FDI) over the past decade, and the development of China’s capital markets and subsequent inclusion of Chinese assets in major global indexes, has so far overshadowed the country’'s efforts to go global. FDI inflows have recently decreased,[3] however, as China’s nonfinancial companies have steadily increased outbound direct investment over the last few years.
FDI in China has declined as China outbound direct investment has risen
This trend suggests that both domestic and international investors may need to consider the global exposure of Chinese companies when making investment decisions. In the face of challenges such as excess capacity and weak domestic consumption, companies with overseas investments and diversified revenue streams may have an advantage over those that rely on the domestic market, but they may also have higher exposure to geopolitical risk.
Certain sectors associated with broader international opportunities
As of April 30, 2024, companies in China, as represented by the MSCI China and MSCI China A Indexes, derived 15% and 16%, respectively, of their revenues from international sources, according to MSCI Economic Exposure data.[4] Overall, this level was low compared to other markets.[5] Chinese companies in the information technology (IT), energy, industrials and consumer-discretionary sectors[6] had higher international exposure, indicating they had established a stronger presence in the global market and were ahead of other sectors in pursuing a go-global strategy.
IT companies had highest international revenue exposure
International revenues tied to stronger performance
In the decade ending December 2023, Chinese stocks with higher international revenue exposure outperformed their parent indexes, especially during bull markets. The 50 stocks with the largest international revenue exposure in the MSCI China Index delivered an annualized excess return of 16% over the MSCI China Index. Over this period, the sector profile of the 50 stocks shifted noticeably toward IT from a previously stronger representation of industrials, mirroring the evolution of many Chinese companies that have turned their sights to international markets. Similarly, the 50 most internationally exposed A shares in the MSCI China A Index outperformed the index by 14% a year for the six years ending 2023.[7]
Companies with higher international revenue exposure outperformed the market
Panel A: MSCI China Index
Panel B: MSCI China A Index
New perspectives linked to international diversification
The continuing growth in outbound investment from China has reflected Chinese companies’ efforts to explore opportunities in overseas markets as well as to adapt to the changing domestic macroeconomic environment. Economic exposure and alternative data could provide new perspectives to help domestic Chinese investors analyze and build portfolios for international diversification. These perspectives could also help global investors better understand portfolio performance and risk exposures related to the China market.