Sep 1, 2019
Barely a blip in the global economy 30 years ago, China transformed into the world’s growth engine by becoming its manufacturing plant. The Middle Kingdom2 is now in its second great transformation, characterised by a shift from volume to value and quantity to quality. If successful, China’s emergence promises to reshape the world order in ways the West has only just begun to appreciate.
In this paper, we analyse China from an asset allocator’s perspective. Specifically, we:
Finally, we apply a well-known asset allocation framework (the Black-Litterman model) to illustrate how China’s emergence as a developed economic super-power might change a typical investment portfolio.
1 Chinese Proverb: English translation: “Dig the well before you are thirsty”. Here 未雨 (wèiyǔ) means before it rains. 未 (wèi) usually refers to something in the future, so in this case the rain. 绸缪 (chóumóu) means to bind something with silk.
So the proverb literally means repair (bind with silk) your house before the rain comes.
2 The term ‘Middle Kingdom’ is a translation of a historical name for China used by the Chinese. Conceptually it means the Chinese saw their country as central.
Specific risk: Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.