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China 2020:
The Birth of a Financial Superpower
From the plunge in the stock market to the unprecedented government
intervention, China has rarely been out of the headlines over the past
six months. This paper will look beyond the headlines and examine
the fundamentals and expected reforms that we believe will propel
China into a financial superpower by 2020 including the liberalization
of the renminbi, opening up of the onshore bond market and greater
accessibility and foreign participation in the country’s stock markets.
October 2015100% 100% Others, 3%, Others, 3%,
with RMB with RMB
90% 90%
estimated to estimated to
80% 80% account for account for
less than 1% less than 1%
70% 70%
EUR, 22% EUR, 22%
60% 60%
50% 50%
40% 40%
USD, 63% USD, 63%
30% 30%
20% 20%
% 24% 10% 10%
% 10%
38% 0%38% 0%
Q3 Q1Q4 Q2Q1 Q3Q2 Q4Q3 Q1Q4 Q2Q1 For many international money
Q4 Q2 managers, investing in China is a risky
Arthur Lau, CFA, CMA, CPA
Q1 Q2 Q3Q2 Q4Q3 Q1Q4 Q2Q1 Q3Q2 Q4Q3 Q1 Q3 Q4
Managing Director,
P
F PEN
RUB PHP PEN
2011 2011 20112011
2011
20112012
2011
2012
2011
2012
2012
2012
2012
2013
2012
2013
2012
2013
2013
2013
2013
proposition. 2014
2013
2014
The 2013
2014
recent2014
2014
2014 2014 2014
plunge in the country’s stock market, along with
Co-Head of Emerging Markets Fixed
USD EUR
USD JPYEUR GBPJPY CADGBP AUDCAD CHF
AUD Others
CHF Others
Income, the government’s subsequent heavy intervention, both serve to support this
Head of Asia ex Japan Fixed Income
attitude. Furthermore, foreign investors still enjoy limited access to the local
H PH
PineBridge
D P S Kong
D D R Hong
Investments, D S R ILBS ENRS RW B P N R W NP RR PN LR P L
NOK
NZD NOK CN VN PHCN TWVN INPH IL TW ARIN TH P A K TH CLPE IDKR MXCL MYID COMX BRMY CO BR
markets.
0% 0%
-5% -5% However, we believe it is important, to see past the immediate noise and look
Desmond Tjiang, CFA
-10% -10%
Portfolio Manager, at China with a more long-term perspective. At PineBridge Investments,
-15% Hong Kong & Greater China Equities
-15% we believe that the pace and trajectory of Beijing’s reform program, if
PineBridge
Average: -15.2% Investments,
Average: -15.2%Hong Kong
-20% -20%
maintained, puts the country on track to become a financial superpower by
2020. The process might not be a smooth one, but at the end of the decade
-25% -25%
Shanghai could rival London and New York as one of the world’s preeminent
-30% -30%
financial hubs.
-35% -35%
Andy Suen, CFA, FRM
Senior Credit Analyst,
-40% -40%
Assistant Portfolio Manager,
-45% -45%
Emerging Markets Fixed Income
PineBridge Investments, Hong Kong
Dennis Lam, CFA, FRM
Senior Investment Analyst,
Assistant Porfolio Manager,
Hong Kong & China Equities
PineBridge Investments, Hong Kong
0.3%
A+ or below
Year-on-year Change against USD – Year-on-year Change against USD –
G10 Countries Emerging Markets
W
OPW
RMB remains resilient
XBN
XN
D
END
H
LSH
YNR
YR
P
TPHHP
D
AVNRD
P
B
L
L
S
DRS
LSP
BCLRP
R
KINRR
CHF GBP JPY CHF
EUR GBP
SEK JPY
CAD EUR
AUD SEK
NZD CAD
NOK AUD NZD NOK
R
TW
TPW
CN
CI N
PH
BR
KCR
CO
VN
AI R
TMH
PME
IN
ID
ICL
M
M
% 0% 0% 0%
against other currencies.
0% -10% -15% -15%
Average: -15.2% Average: -15.2%
Average: -16.6% Average: -16.6%
0% -20% -30% -30%
0% -30% -45% -45%
Source: Bloomberg, as of 12 August 2015.
2 PINEBRIDGE INVESTMENTS2020: Renminbi becomes a reserve currency
The process to internationalize the renminbi (RMB) has come a long way
since an offshore market was created for the currency in 2003. Its use
overseas has accelerated in recent years, with the balance of offshore RMB
deposits reaching RMB2.0trn (US$320bn) at the end of 2014, according to the
People’s Bank of China (PBoC).
The growing importance of the RMB reflects China’s increased significance
in global trade: it is now the fifth most used currency in trade payments,
as well as the ninth most actively traded currency according to data from
SWIFT1 and the Bank for International Settlements2.
The PBoC is also guiding the currency towards a more market-oriented
pricing mechanism. Some commentators have viewed the recent volatility
in the daily fixing of the RMB as the prelude to a potential structural
devaluation. We do not think this is the case, since the RMB still remains very
resilient against other currencies. It depreciated just 4.6% against the US
China’s domestic stock
dollar in the year ending August 31st, while G10 currencies on average fell
17% against the dollar over the same period. Emerging markets currencies market is the largest in the
lost an average of 15% against the dollar3. world.
While a market-based mechanism necessarily implies higher volatility in the
short-term, we believe the RMB will be supported over the medium term by
China’s above-average economic growth rate and a strong current account
position.
In addition, China is bidding for the RMB to be included in the International
Monetary Fund’s Special Drawing Rights (SDR) – an international reserve
asset, the value of which is derived from four major currencies 4. Beijing
is actively pressing for the RMB’s inclusion into the SDR basket, and the
current Premier Li Keqiang, as well as his predecessors, have made it
abundantly clear that China will accelerate financial reforms in order to meet
the inclusion criteria.
The RMB could achieve reserve currency status as soon as 2016, and this
would likely result in a further relaxation of China’s capital account, which
would in turn pave the way for increased foreign investment into its domestic
stock and bond markets.
1
Source: SWIFT. The Renminbi is the second most
used currency for cross border payments with China
and Hong Kong. As of June 2014.
2
Source: Bank for International Settlements.
Foreign Exchange Turnover in April 2013: Preliminary
Global Results (page 5). As of September 2013.
3
Source: Bloomberg data as of 31 August 2015.
4
Source: International Monetary Fund. Factsheet
– Special Drawing Rights (SDRS). As of 31 August
2015.
CHINA 2020 32020: Chinese equities – The world’s most liquid asset
class
China’s domestic stock market, known as the A-share market, is the second
largest equity market in the world and the largest by turnover 5. While Hong
Kong’s H-share market is already a popular venue for foreign investors to
gain exposure to China, the A-share market is in many ways more attractive
since it has more listed companies in a wider range of industries – especially
with regards to privately-owned companies in high-growth sectors such as
healthcare, media, and information technology.
Access to the A-share market has traditionally been limited to a group
of foreign investors who participate in the Qualified Foreign Institutional
Investors (QFII) program. The situation changed late last year, when China
launched the Shanghai–Hong Kong Stock Connect program, which gave all
international investors access to a selection of Shanghai-listed A-shares
through Hong Kong-based brokers and clearing houses.
Senior government officials have repeatedly emphasized that the quotas
for the Stock Connect program could be relaxed and eventually eliminated
altogether, which could allow for foreign investors to invest even more into
local stocks.
The next step in China’s opening of its capital account recently came in the
form of the Mainland–Hong Kong Mutual Recognition of Funds Program
(MRF), which was announced in May by the Hong Kong Securities and
Futures Commission (SFC) and the China Securities Regulatory Commission
(CSRC). The MRF program allows Hong Kong-domiciled offshore funds to be
distributed directly to investors in China, and qualifying Chinese funds to be
distributed in Hong Kong. Qualifying funds are expected to include general
equity funds, bond funds, mixed funds, unlisted index funds, and physical
index-tracking ETFs.
Initially, the MRF program is capped by a RMB300bn (US$47bn) quota in
both Hong Kong and China. We consider the program as a major milestone
as it offers overseas investors, especially retail investors, an additional
investment channel into the China onshore markets through lower-risk fund
and ETF products, which could nurture experience and greater familiarity
of the A-share market for international investors, paving the way for the full
liberalization of China’s financial markets in the future.
Another landmark for Chinese stocks would be the inclusion of A-shares
into major indices. At the June 2015 review and following much speculation,
MSCI opted not to include A-shares in its benchmarks. However, the China
Securities Regulatory Commission and MSCI have set up a working group
5
Source: Bloomberg, calculation based on 2015
YTD until 31st August.
to resolve together the outstanding issues for the inclusion of A-shares –
6
Source: Goldman Sachs estimates. which includes quota allocation, beneficial ownership, and capital mobility
restrictions.
4 PINEBRIDGE INVESTMENTSMarket Capitalization to GDP
200% 160
182% 59%
140
34%
145% 120
150%
% Market cap to GDP
100 15%
USD billion
90% 80China total market cap
100%
60could be as 40%
large
36% as
2% 44%
64% 38% 31%
40US$13trn by 2020.
50% 20%
20
0
MXN BRL KRW PLN TRY CNY MYR IDR ZAR THB
0%
US Japan Taiwan China % of outstanding government bonds
Source: Bloomberg, as of 31 August 2015.
4.5 CHF GBP JPY EUR SEK CAD
0%
4.0
Chinese regulators have already taken meaningful steps to improve CGB foreign
3.5
-5%
investors’
3.0
accessibility to the A-share market, and given the effort
UST and
willingness
2.5 shown by both MSCI and CSRC, we believe the inclusion GILT of -10%
Yield (%)
A-shares
2.0 into MSCI indices could happen as early as 2017. While there is no
1.5 way to gauge the potential impact that this would haveBUND
precise on A-share -15%
JGB
Average: -16.6%
flows,1.0we expect to see at least US$100bn of net inflows into the A-share
-20%
0.5
market in the decade following MSCI index inclusion. We believe this will
0.0 -25%
happen as a result of large global funds – many of which currently have
-0.5
no exposure
0 in the
5 A-share10 market15– are required
20 to25take a stake
30 when
35 -30%
A-shares form part of the MSCI indices.
Maturity (Years)
More6 importantly, MSCI’s inclusion of A-shares could trigger greater 70%
AA
understanding and broader foreign participation into the largest and most 61%
5 60%
liquid RMB asset class in the world, especially as the RMB is expected to
AAA
concurrently achieve the status of a major investable reserve currency. 50%
4
39%
Yield (%)
While
3
foreign investors only hold around 2.8% of the total A-share
CGB market 40%
cap as at March 20156, we believe it will gradually increase to a level between30%
20%2and 30%, which would put it on a par with foreign ownership seen in 20%
other
1
Asian markets – such as Korea, Taiwan and India.
10%
The 0Chinese stock market is also small in proportion to the size of its 0%
economy,
0 as its market
2 capitalization
4 to
6 gross domestic
8 product
10 is much
12 AAA AA
lower than in the US, Japan, and Maturity
Taiwan,(Years)
which can be partly attributable to
the low institutional and foreign participation in the market. Although there
are around 2,600 companies listed in Shenzhen and Shanghai, there are still
many more companies that could list. The low market cap to GDP can also be
attributed to the fact that many of the country’s biggest companies are listed
overseas,
CHF such
GBP as
JPYBaidu
EUR and Alibaba.
SEK CAD AUD NZD NOK CNH VND PHP TWD INR ILS ARS THB PEN KRW CLP IDR MXN MYR COP BRL
0% 0%
-10% -15%
Average: -15.2%
-20% -30%
Average: -16.6%
CHINA 2020 5
-30% -45%With greater accessibility and increased foreign participation, we believe
China’s total market cap could increase further towards US$13trn by 2020.
By then, the A-share market could also become an important source of RMB
financing for foreign companies, which could potentially make Shanghai an
alternative to London and New York for companies looking to raise capital.
On the economic front, many foreign investors remain concerned that
China could suffer a hard landing, although our view remains that a sharp
slowdown of the Chinese economy is unlikely. President Xi Jinping’s
administration has already rolled out a number of policy initiatives to
stabilize the economy and reduce the chance of tail risks as it shifts away
from its traditional investment-driven growth model, towards one where
services and consumption takes a greater role. The transition is evident in
data that shows slowing credit growth and fixed asset investment. Monetary
easing is also helping to reduce the overall interest burden on the economy.
The One Belt One Road strategy also has the potential to export some of
China’s overcapacity to other countries – especially in the materials and
machinery sectors – while increasing the awareness and demand for
Chinese brands and products. The “Made in China 2025” and “Internet+”
initiatives provide a roadmap for the next leg of economic growth over the
medium term.
So while China’s GDP growth is expected to decelerate, all of these policy
initiatives should reduce the overall risk in the economy. This will lead to
more sustainable growth over the medium term, which will make Chinese
stocks a more attractive investment.
6 PINEBRIDGE INVESTMENTSForeign ownership of EM government bonds
As end of 2014, USD bn, % of outstanding government bonds
100%
160
90%
140 59%
80%
34%
120 70%
100 15% 60%
Foreign ownership of China
USD billion
50%
80
40%
40% onshore bonds to double by
60 36%
64%
40
2% 44% 38% 31%
30%
20%
2020.
20% 43% 10%
20 24%
10%
38% 0%
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q
MXN BRL KRW PLN TRY CNY MYR IDR ZAR THB HUF RUB PHP PEN 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2
China % of outstanding government bonds USD EUR JPY GBP CAD AUD CHF O
Source: Standard Chartered as of end 2014.
CHF GBP JPY EUR SEK CAD AUD NZD NOK CN
H
VN
D
PH
P
TW
D INR ILS AR
S
TH
B
PE
N
KR
W CLP IDR
MX
N
M
0% 0%
CGB
2020: Foreign ownership of onshore bonds to double
-5%
-5%
UST
China’s onshore bond market has grown dramatically over the past decade, -10%
GILT
at a compound annual growth rate of 21%, to reach RMB39.5trn (US$6.4trn)
-10% -15%
Average: -15.2%
BUND
as of -15%
June 2015 according to the PBoC – making it the world’s third largest,
-20%
JGB trailing only the US Average:
and Japan-16.6%.
7 -25%
-20%
-30%
While large in absolute size, China’s bond market is like its equity market in
-25% -35%
that it is small compared to its economy - equivalent to only a modest 56%
-40%
0 35of national
-30% GDP. The markets in the US and Japan are equal to more than -45%
twice the size of their respective economies. We expect the growth in China
to remain
70% fast-paced and that the total market size will more than double to
A
61% 8
RMB90trn
60%
(US$14trn ) by 2020.
AAA The bond
50% market has played a critical role in the implementation of the
government’s
40% macroeconomic policies 39%and financial reforms – one notable
GB
example is the ongoing local government debt swap program that was
30%
launched in March 2015. We believe policymakers will continue to develop a
20%
deeper and more efficient market, which will provide numerous economic
10%
benefits. A healthy bond market will reduce the current overreliance on the
0.3%
banking0% system for credit, it will improve the pricing of credit risk, while
12 AAA AA A+ or below
at the same time it will impose discipline on local governments and state-
owned companies.
We believe the easiest way for global investors to get RMB bond exposure
is via the offshore RMB (i.e., CNH) bond market, which had a size of
RMB672bn (US$108bn) as of end-2014. We believe the momentum of RMB 7
Source: Bank for International Settlements data.
CNH VND PHP TWD INR ILS ARS THB PEN KRW CLP IDR MXN MYR COP BRL 8
The estimate is based on assumptions of
% internationalization will continue to fuel the growth of the CNH0%bond market
W
D
H
N
P
D
B
S
R
CHF GBP JPY EUR SEK CAD AUD NZD NOK
S
TW
CN
PH
KR
VN
AR
TH
PE
IN
IL
1.5% annual fiscal deficit funded by0%Chinese
%
as more multinationals issue RMB bonds and Chinese firms diversify their
Average: -15.2% Government Bonds, RMB14trn (US$2.2trn)
municipal bond issuances and credit bond
%
investor base. -10% issuance to grow at 20%+ p.a. in the
-15% next five
% Average: -15.2%
years.
Average: -16.6%
-20% -30%
CHINA 2020 7
-30% -45%Currency Composition of Global Official Foreign Exchange Reserves
100% Others, 3%,
with RMB
90%
estimated to
80% account for
less than 1%
70%
EUR, 22%
60%
China has the potential 50%
40%
36% to reach 10% index
2% 44% 30%
USD, 63%
38% 31%
weightings.20% 43% 20%
24% 10%
10%
38% 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
TRY CNY MYR IDR ZAR THB HUF RUB PHP PEN 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014
% of outstanding government bonds USD EUR JPY GBP CAD AUD CHF Others
Source: IMF, PineBridge Investments as of 22 September 2015
H D P D R ILS S B EN RW LP IDR N R P L
EUR SEK CAD AUD NZD NOK CN VN PH TW IN AR TH P K C MX MY CO BR
0%
Nevertheless,
-5%
the size of the onshore bond market dwarfs the offshore
one and the further opening up of the onshore market is an essential step
-10%
for RMB internationalization. Currently, foreign investors can access the
-15%
onshoreAverage:
bond market
-15.2% via two schemes: firstly the QFII program launched in
-20%
2002 and its extension RMB QFII (RQFII) launched in 2011; and secondly, the
16.6% -25%
PBoC’s interbank bond market program launched in 2010 that is applicable
-30%
to six different kinds of investors – central banks, sovereign wealth funds,
-35%
clearing banks, settlement banks, multinationals and insurance companies.
-40%
Since the launch of these programs, accessibility has gradually increased, as
-45%
quotas on both the QFII and RQFII programs have grown in size. In July 2015,
the PBoC significantly increased flexibility in the interbank bond market
program by allowing participants to make investments via a filing process,
instead of a pre-approval process. Over the long-term, we believe that the
quota system is a temporary arrangement that will exist until the RMB
39% reaches full convertibility. We also expect that the PBoC’s interbank bond
market program will be expanded to cover a broader range of investors over
time.
Essentially, our view is that the current restrictions to access will be
0.3%
substantially loosened over the coming years, in line with the fast pace of
RMB internationalization.
AA A+ or below
As of the first quarter of 2015, foreign investors owned RMB713bn9
(US$111bn) worth of onshore bonds, of which RMB235bn10 (US$38bn) was in
Chinese government bonds (CGBs). This is small in percentage terms, with
foreign ownership merely 2.0% of the onshore bond market and 2.8% of
CGBs. This percentage is low when compared to other major economies – for
MXN MYR COP9 BRL
example, foreign bond ownership in Malaysia and Indonesia is 44% and 38%
Source: PBoC. Data as of 31 March 2015.
W
XN
D
H
YR
N
P
D
P
B
L
S
P
respectively.
R
CHF GBP JPY EUR SEK CAD AUD NZD NOK
R
S
TW
CN
PH
BR
KR
CO
VN
AR
TH
PE
CL
IN
ID
IL
M
M
0% 0%
10
Source: http://www.chinabond.com.cn/
-10% -15%
8 PINEBRIDGE INVESTMENTS Average: -15.2%
Average: -16.6%
-20% -30%5 Year Yield Correlation
CGB UST JGB BUND GILT
Chinese government bonds
CGB 1.00 0.09 0.13 0.10 0.15 have minimal correlation
USTR 1.00 0.40 0.58 0.75 with other major bond
markets.
JGB 1.00 0.30 0.64
BUND 1.00 0.64
GILT 1.00
Source: Bloomberg, PineBridge Investments. As of 28 August 2015
We expect foreign ownership percentage in the onshore bond market to
double (to 4%) by 2020 and that it could reach 15% over the long term. This
2% increase translates into RMB2.9trn (US$450bn) in additional net foreign
purchase over the next five years.
We expect foreign central banks and sovereign wealth funds will be major
investors as they increase reserve allocation to RMB assets – which
currently accounts for less than 1% of global foreign exchange reserves
according to IMF data. Considering that China is the world’s largest exporter
(13.3% of global trade) and its second largest economy (13.4% of global GDP),
this suggests that RMB assets are very much under-owned11. Regardless
of the timing of SDR inclusion, we believe that the RMB will account for an
increasing share of global foreign exchange reserves in the coming years.
In addition, we also expect CGBs to be included in major government bond
benchmark indices in the next couple of years. For example, China could
potentially reach an index weighting of 10% if it is included in the widely
followed GBI-EM Global Diversified index. The index is tracked by funds with
US$180bn assets under management, according to J.P. Morgan, implying a
potential US$18bn allocation to the Chinese market from these funds alone.
As is shown in th table above, CGBs have showed minimal historical
correlation with government bonds in other major bond markets.
The five year CGB is currently yielding 150–300 basis points more than US
Treasury bonds, Japanese Government Bonds, German Bonds and UK GILTs
at the same tenor. Since inflation in China remains benign, the real yield of
its bonds remains higher than in other markets.
11
Standard Chartered special report, Renminbi
Internationalization – The Pace Quickens. 10 June,
2015.
CHINA 2020 9200% 160
182% 59%
140
145% 120
150%
% Market cap to GDP
100
USD billion
90% 80
100%
60
64%
40
50%
20
0
MXN
0%
US Japan Taiwan China
Foreign ownership of EM government bonds
4.5 CHF
0%
4.0
CGB
3.5
-5%
UST
3.0
GILT
2.5 -10%
Yield (%)
China has strong sovereign 2.0
BUND -15%
fundmentals and healthy 1.5
1.0
JGB
-20%
fiscal profile. 0.5
0.0 -25%
-0.5
0 5 10 15 20 25 30 35 -30%
Maturity (Years)
Source: Standard Chartered as of end 2014
6 70%
AA
We believe
5 the macroeconomic backdrop is also supportive for the Chinese 60%
bond market in the near future. The PBoC has cut the benchmark AAA lending 50%
4
rate five times since November 2014 as the economy decelerates. As the
Yield (%)
CGB 40%
rate3of economic growth moderates and interest rates remain higher than
30%
in other major economies, China is likely to maintain an easing stance in
2
the near future, which will prove a further support to the bond market. With 20%
the Federal
1 Reserve expected to raise interest rates in the near future, the 10%
outlook for total returns in developed economies is not as promising, since
0 0%
the rates
0 in these2 markets tend
4 to be highly
6 correlated.
8 Last
10 but not least,
12
as reflected in the AA- sovereignMaturity
credit(Years)
rating, China has strong sovereign
fundamentals with a healthy fiscal profile and a robust external position.
CGBs and agency bonds account for 55% of China’s bond market12. We
expect the proportion of non-central government bonds to increase, as the
government relaxes policies relating to the issuance of bonds by corporates
and
0% local governments.
CHF GBP JPY EUR SEK CAD AUD NZD NOK
0%
CNH VND PHP TWD INR ILS ARS T
The
-10%
pace of liberalization has quickened over the last year. In theAverage:
-15%
first -15.2%
half of
2015, we sawAverage:
-20% the first
-16.6% bond by an unlisted corporate in the exchange market,
-30%
the
-30% first local government bond under the debt swap program, -45% and the first
bond by a red-chip property developer. We expect more milestones in the
future.
In terms of foreign ownership, foreign investors have 88% of their exposure
in CGBs and agency bonds and only 12% in credit bonds13. This also means
foreign investors own less than 1% of the total credit bonds outstanding. We
believe this is mainly because there is not sufficient differentiation in the
pricing and local ratings of credit bonds. As of June 2015, according to Wind
data, 61% of credit bonds were rated “AAA” by domestic rating agencies, 39%
12
Source: Wind. Data as of 30 June 2015.
13
Chinabond.com.cn. Data as of 30 June 2015. in “AA-” to “AA+” and 0.3% in “A+” or below.
10 PINEBRIDGE INVESTMENTSWe notice that within the same rating category, there is a wide range of
credit quality. Some companies with a high yield international credit rating,
for example, have the same rating as solid quasi-sovereigns at the “AAA”
category by domestic rating agencies. This means that until we see risk
priced more efficiently, as well as a better local rating framework, in-house
credit analysis will remain extremely important.
In the coming years, we expect to see gradual improvements in both
these areas. We anticipate more defaults in coming years, which will help
encourage the development of proper credit ratings and risk pricing. In
addition, the government could potentially open the doors to international
rating agencies to rate local government securities, according to a joint
statement in June from the China-US Strategic and Economic Dialogue.
By 2020, we expect CGBs and agency bonds will still account for a major
portion of the foreign investor portfolio, but the proportion of non-central
government/agency bonds, particularly those of strong SOEs and local
governments, should increase from the current levels.
CHINA 2020 11Chinese policymakers 2020: Rocky road ahead
must strike balance After decades of strong growth, China is now embedded into the global
economy. Its financial system however, remains largely closed off to foreign
between reforms, investors. It is clear though, that the Chinese government wants to grant
economic growth and more access and is determined to integrate its markets into the international
stability. financial system. This is not going to be a smooth journey.
The main issue is that Chinese policymakers are mindful of striking a
balance between introducing further market reforms, while at the same time
maintaining both economic growth and social stability.
The government’s recent heavy intervention in the stock market, an attempt
to stabilize plummeting share prices, is a case in point – as it clearly
demonstrates the tensions that Beijing faces. While we do not think the
recent market correction in stocks will create systemic risks, it is likely
to delay, if not derail, some market reforms in near term, such as the
Shenzhen–Hong Kong Stock Connect Scheme which has been put on hold.
The intervention also suggests that the current supervisory know-how may
not be strong enough to achieve effective oversight over domestic markets
that are becoming increasingly more complicated and integrated into the
international financial system. Policymakers will likely be under pressure if
they allow the local markets to open up and liberalize too fast.
It should be no surprise that the recent events on the stock market have
had an impact on the perceptions of foreign investors. Concerns over policy
transparency, corporate governance, and investor protection, have all
contributed to a more cautious stance towards investing in China. We think
this will result in higher risk premiums in China over the near term, but at
the same time we believe it will also create opportunities to those investors
that have stronger in-depth, on-the-ground knowledge about the country and
the direction of policy.
There is still lots of work that needs to be done: for example, international
rating agencies need to operate locally, there needs to be a more
transparent taxation system for foreign investors, and investor-friendly
default procedures need to be put in place.
These are just some of the things that need to be introduced, in order to help
restore confidence among international investors towards China and to get
them to regard its assets as core long-term holdings.
12 PINEBRIDGE INVESTMENTS2020: Closing thoughts
By the end of the decade, we expect China to have a financial system
worthy of the world’s second largest economy. Its stocks and bonds will
become ever more accessible to foreign investors as Beijing continues to
liberalize its domestic markets. While this process may increase volatility
and uncertainty, it could at the same time present outsized investment
opportunities to those who have a strong understanding of the country’s
unique challenges.
CHINA 2020 13PineBridge Investments provides solutions for investors, spanning the full spectrum of asset classes
and geographies around the globe. We manage more than US $38 billion in fixed income assets across
About developed, emerging and leveraged finance markets. Our investment professionals focus on delivering compelling
results for our clients, and the global interconnectivity among our teams allow us to remain at the forefront
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