Ox tales: can China do the heavy lifting?

In the year of the ox, much hinges on whether China can sustain its recovery and pull other economies out of their pandemic slumps. But besides GDP growth, investors can ride other trends that China will strongly influence over the next 12 months and beyond. As the Chinese New Year dawns, Ninety One’s investment teams look ahead.

5 Feb 2021

10 minutes

The rat won the zodiac race, but only by riding the ox across the river.

As the year of the ox dawns, much rests on whether China can shoulder global growth and tow other pandemic-weakened economies out of their slowdowns.

But as Ninety One’s investment teams explain, China will set the pace in more areas than economic growth. From bond yields to technology to decarbonisation, investors can tap into a number of important trends that China will lead or significantly influence over the next 12 months and beyond.

Above all this year, China will put itself first – hence the ‘dual circulation’ philosophy it has adopted – even as it opens its capital markets to foreign investors, thereby giving them easier access to the China story. In 2020, China overtook the US to become the leading recipient of foreign direct investment – how long before it takes top spot for foreign portfolio investment?

At the very least, everyone will need to keep a close eye on developments. The ox has a reputation for being calm. But you wouldn’t want to be standing in the wrong place if it suddenly changed direction.

Ox tales: can China do the heavy lifting?

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For income, China bonds yield to (almost) none

Sun breaking through clouds over Shanghai
China is the only large and liquid bond market with positive real interest rates. That makes it an interesting option for global investors.

Perhaps nowhere is China more ox-like than in its bond markets. We think that makes it a useful option for global investors.

Resolutely committed to orthodox monetary policy long since the rest of the world’s major economies abandoned it, Chinese authorities show no sign of diverting from their lonely furrow. As a result, China remains the only large and liquid fixed income market with positive real rates.

At the start of a new Chinese year, while developed bond markets are anxiously trying to figure out if we are entering a reflationary trend – which will herald the end of ‘lower for longer’ interest rates and the unconventional policy approaches that have accompanied them – Chinese bonds offer the prospect of continuity and carry.

More international investors are climbing aboard. In 2020, foreign inflows into onshore CNY bonds hit a new record of over US$150 billion. We expect the mainstreaming of Chinese bonds to accelerate this year, spurred by the imminent inclusion of China to the FTSE World Government Bond Index.

While China’s monetary policy remains firmly conventional in terms of its overall approach, its bond markets are far from static. For example, the Chinese corporate credit segment is continuing to mature, as regulators dismantle the perceived ‘state put’. This will pave the way for a healthier differentiation in credit spreads based on fundamentals, rather than proximity to the state. The broader point is that while we expect China’s bond markets to power along the same track they have ploughed for some years now, we should still expect to encounter the odd bump along the way. The resulting dispersion and volatility, around a steady channel, should make it an interesting year for active investors.

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Our China experts

Deirdre Cooper
Portfolio Manager
Greg Kuhnert
Portfolio Manager
Wenchang Ma
Portfolio Manager
Dr Michael Power
Philip Saunders
Director Investment Institute
Alan Siow
Co-Portfolio Manager, All China Bond
Wilfred Wee
Co-Portfolio Manager, All China Bond

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Issued by Ninety One, January 2021