Finding Investment Opportunities in China in the Age of #TheZero


China’s economy has performed well in the past year due to its ability to manage the Covid-19 crisis, delivering timely and effective monetary and fiscal stimulus measures. The country recorded an 18% year-on-year GDP growth in the first quarter of 2021 – setting a historic single quarter record, but with growth now normalising, can investors still find opportunities in China in the age of #TheZero?

David Rees, Economist, Schroders, told the audience on day one of Schroders’ flagship investment conference for clients across the Asia Pacific region#, that he believes what China is experiencing is a healthy slowdown in growth and that this presents opportunities for active investors. Angus Hui, Head of Asian & Emerging Markets Credit, Schroders, added that China’s fixed income market presents many interesting opportunities against the back drop of very low global interest rates and ESG issues.

David Rees said:

“Growth in China is going to be slower over the long term, but it will still be faster than other markets in the world. We expect China to be growing at around 5% per year over the next decade, and productivity growth will be key in achieving that. Building up the high technology sector should help with this, and this could also help raise the overall income level of the country and its income per capita over the long term.

Angus Hui said:

“With the low interest rate environment, China’s opening of its bond market is timely and attractive for investors. The China onshore RMB-denominated bond market is now the second largest bond market in the world after the US, and its offshore USD-denominated bond market accounts for more than half of the total market share in Asia fixed income. The further gradual index inclusion of Chinese government bonds in international indices and the continued demand from foreign investors will help further support China bond markets which is well developed relative to most other emerging markets.”

“Chinese corporate bonds boast attractive yields and wider spreads with lower duration risks than other global credit markets. The investment grade market has delivered relatively steady performance over the last five years. In today’s historic low interest rate environment, this additional income and carry benefit could prove to be even more valuable for investors. We are also seeing some multinational corporations financing their capital requirement via the RMB-denominated bond markets, and these will offer additional benefits and diversification for investors as well.”

“Another point to note is that Chinese bonds have low correlation with other asset classes, which means they can offer diversification benefits. China’s economic and monetary policy cycles will not be perfectly synchronized with other parts of the world, but influenced by conditions within China. That ought to lead to lower correlations between Chinese bonds and other markets. But when assessing fixed income opportunities in China, take for example the real estate sector, the key is to have a forward-looking view on individual names and assess other factors such as their landbank, execution capabilities, access of other borrowing channels, and balance sheets quality.”

“Green bonds are the other area that investors may want to pay attention to, as it is aligned with the country’s sustainable development goals. We expect more Chinese green bond issuances to occur in both the onshore and offshore space, especially now that its standards have elevated much closer to international levels. For instance, green coal projects are no longer considered as green bonds in China anymore, and we expect more companies from the renewable and alternative energy sectors, as well as new economy and tech companies, to issues green bonds going forward.

Schroders believes the best approach to fixed income investing in China is to have a flexible approach that allows you to invest in both onshore and offshore markets. One of the key benefits with onshore is its diversification benefits, whilst offshore offers better trading liquidity and valuation, especially in high yield names.

#On 29 and 30 June 2021, Schroders engaged financial industry professionals and business leaders at its flagship investment conference for clients across Asia Pacific to discuss the potential levers investors can pull to drive sustainable investments in #TheZero environment – whether it is in the interest rate policy, return on traditional income investments, the rising urgency to reach net zero emissions, or in a world where zero action means zero results.

A diverse line-up of thought leaders discussed a range of topics, from the role that policy makers and investment managers play, to exploring new investment themes and solutions that have opened up for investors in the dynamic age of #TheZero, with a particular focus on private markets, income investing, China, thematic investing, energy transition and climate change.

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