The RMB1trn bet in 2020 by global investors on Chinese assets rounds off the most curious year for the world’s second-largest economy.
As the first country to face the novel coronavirus, it had the difficult task of comprehending how best to respond to the rapid spread of Covid-19.
The uncertainty hit markets, with steep drops in the country’s benchmark CSI 300 index in January and March, matched by plunges in government bond yields.
Despite some misgivings from other nations about how China initially dealt with the virus though, it later received plaudits from Mike Ryan, the World Health Organisation’s executive director of health emergencies, for its “tireless” efforts to bring the virus under control.
Cue a rally in risk assets, which led to China’s domestic equity index returning 27 per cent in dollar terms to mid-December – 13 percentage points above the S&P 500 – and its tech-focused index also beating its rival, the Nasdaq Composite.
During this tumultuous year, global investors finally seem to be embracing China.
The most curious thing of all, though, is why they aren’t embracing it more.
A long-term plan
China is different to many other countries in that it truly thinks about its long-term future. It has grand plans and is patient in its bid to achieve them.
And investors who adopt a similar mindset in regards to China are likely to be rewarded.
China may have closed itself off from the rest of the world for much of the 20th Century, but this is rapidly changing.
The shift creates an opportunity for investors, particularly in the renminbi, which China wants to become a reserve currency.
To help it with its global investment plans, such as the ‘Belt & Road Initiative’ which will cement China’s place in world trade, the country needs to free up capital from within its borders that can then be deployed internationally.
To do this, it needs to attract foreigners to invest in the renminbi – and there’s every reason it will succeed.
Global investors are struggling to find yield, with $18trn in global debt offering negative yields by mid-December.
Even at their 2020 nadir, 10-year Chinese government bond yields only hit 2.55 per cent, and at the time of writing yielded 3.3 per cent.
Add in a tiny bit of credit risk by investing in quasi-government debt, and the yields are even more attractive.
Pair this with recent weakness in the dollar, outgoing US president Donald Trump’s trade spat with China, and fears about the strength of the US economy during its Covid recovery, and it’s hard to see how more capital won’t seek a home in the east.
Another important element for investors to consider is that China’s central bank targets growth and aims to strengthen its currency.
These strategies counter what much of the western world does; target inflation (which effectively makes the respective country poorer) and keep currencies weak with the hope of spurring inward investment.
These western strategies make little sense and, if anything, will only hasten the renminbi’s rise to dominance.
As the world enters the post-Covid world, investors will be keen to back nations that can pay off the debt amassed to fight the pandemic.
For the likes of Europe and the US, their huge debt-to-GDP ratios, coupled with declining working-age populations, will make them less and less appealing places for investors to back.
Although Covid-19 might have made China temporarily stumble, in the long run it could end up being the event that enables it to assert its dominance.
Andy Seaman is chief investment officer at Stratton Street Capital. The views expressed above are his own and should not be taken as investment advice.
This article first appeared on Trustnet.