China Exposure in Global Capital Flows

With China’s opening of its domestic capital markets to the world in the early 2000s, and major index providers’ adding China A shares to their global indexes in 2018, foreign participation in China’s capital markets has grown rapidly, increasing their sensitivity to global fund flows and volatility. As a result, right-sizing China exposure in portfolios has become an increasingly important consideration for global investors.

To address this need, we propose a quantitative framework for tracking international economic and financial trends through a range of indicators — leading, concurrent and lagging — to help clarify their multi-layered impact on China’s markets and economy. A comprehensive analysis of these indicators may help investors develop a balanced perspective of international economic and financial dynamics and a better understanding of the opportunities and risks associated with their China equity portfolio.

In this report we applied the framework to China investing, but the approach can be adapted to assess exposure to other markets.

A framework for tracking linkages of international economic and financial flows