China: dig the well before you’re thirsty¹

An asset allocator’s framework

1 Sept 2019

50 minutes

The fast view

  • China is rapidly becoming one of the biggest decisions asset allocators must make.
  • Allocation models suggest that China’s emergence could substantially change investment portfolios.
  • As China’s weighting in major benchmarks grows, investors maintaining their existing allocation framework will be incrementally gaining more exposure to the country — but with little investment rationale supporting the allocation.
  • Based on China’s size, growth trajectory and distinctive characteristics, a separate allocation to the country may now be appropriate.

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:

  • Assess the characteristics and composition of modern China’s investment markets, including the risks of a market unlike any other major power.
  • Evaluate existing asset allocation approaches and consider whether China now warrants a separate allocation.

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.

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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.

Authored by

Philip Saunders

Co-Head of Multi-Asset Growth

Sahil Mahtani

Multi-Asset strategist

Daniel Morgan

Multi-Asset analyst


Greg Kuhnert – Portfolio Manager, All China Equity; Nidhi Mahurkar – Investment Director, All China Equity and Mark Evans – Analyst, All China Bond

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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