Despite a global coronavirus pandemic that began in China, 2020 has turned into the year that everything came together for the country’s financial markets, as foreign investors grabbed more than Rmb1tn of shares and of bonds.
China’s benchmark CSI 300 is up about 27% this year, in dollars, topping the S&P 500 by more than 13 percentage points. Shenzhen’s tech-focused ChiNext rose about 59%, on the same basis, even surpassing the leaking US tech benchmark, the Nasdaq Composite. Chinese government bonds have also attracted new fans with their rare source of yield.
The $ 150 billion in inflows, which come from Hong Kong programs that connect investors to the mainland, stands in contrast to January, when Chinese stocks were the first in the world to feel the heat of the pandemic. Investors believe the outbreak is likely to continue to occur.
“I’ve been in Asia for 20 years and for most of that time it has been quite difficult to get investors to look at the onshore market,” said Kenneth Akintewe, Head of Asian Sovereign Debt at Aberdeen Standard Investments.
This year has taught a hard lesson to those who have hesitated to match the increased weightings of global benchmarks for Chinese stocks, he said. “For any underweight emerging market investor it was a pretty painful job.
The Chinese bond market in particular has attracted massive investors during the pandemic thanks to reforms to open up the country’s financial system and Beijing’s initially slow but ultimately decisive response to the Covid-19 epidemic.
Tough lockdowns across the country were found to be enough to get the economy back on its feet and operate near full capacity in the second half of 2020 – even as the rest of the world struggled to bring the spread of the virus under control.
“China is much further along on its path to post-Covid recovery,” said Paul Colwell, head of the Asia advisory group at Willis Towers Watson. “The way policy makers act in response to changes in the economy, monetary policy, fiscal policy. . . China operates at a fundamentally different frequency from the rest of the world, ”he added.
With China’s growth returning to pre-Covid levels and domestic consumption picking up again, the central bank has been able to leave benchmark interest rates almost intact, while others have cut sharply their own or have launched bond buying programs that have crammed close to zero returns.
This meant China was the only game in town for yield-seeking debt investors. Foreign holdings of Chinese public debt through the market link in Hong Kong increased by more than Rmb900 billion in the first 11 months of 2020.
Sameer Goel, macro-strategy strategist at Deutsche Bank, said foreign bond purchases this year were “even larger than one might expect” from passive flows after global benchmarks started including Chinese public debt in 2019.
Mr. Goel said that foreign purchases of onshore bonds, which another boost next year its inclusion in the influential FTSE Russell global government bond index contributed to a record six-month rally for the renminbi.
“Pent-up demand among global investors who wish to diversify away from the US dollar” is helping to support the Chinese currency, said Julia Ho, head of macro Asia at Schroders.
This growing confidence in the renminbi, which had suffered a series of sharp declines in recent years with the intensification of the US-China trade war, also helped allay investor apprehension about Chinese stocks, which are among the top performers of 2020.
Equity inflows, while much smaller than those in the bond market, are now positive after the outflows earlier this year. Since Donald Trump lost the US presidential election in November, almost certainly establishing calmer US-China relations, the buying appetite has increased, with net overseas purchases of Chinese stocks through of a Hong Kong equity connection program costing approximately 170 billion rmb ($ 26 billion). year.
Joe Biden’s victory helped push the benchmark CSI 300 of stocks listed in Shanghai and Shenzhen up 6% in November.
Even despite mounting tensions, flows to China have proceeded at a rapid pace throughout the Trump presidency, with total inflows of more than $ 620 billion during his four years in office. Likewise, the number of Chinese IPOs in the United States grew faster under Trump than under Barack Obama. But the country is facing growing bipartisan hostility in Washington, and Mr. Biden has said he will not immediately lift Mr. Trump’s trade tariffs.
“The position will remain unfavorable,” said Thomas Gatley, analyst at Gavekal Dragonomics in Beijing.
A global vaccine rollout could also undermine China’s competitive advantage as one of the few major global export economies that work, Gatley added.
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Recent bond defaults by cash-strapped state-owned enterprises, once viewed as fully guaranteed by Beijing, have also alarmed some local investors, who fear policymakers’ desire for fiscal discipline will return. This could lead to more caution on the part of investors, said Michelle Lam, senior China economist at Société Générale, “and this tightening of credit conditions will be negative for growth.”
But Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management, suggests that China is positioned for both positive and negative scenarios for the coronavirus, and that global flows to the country are “going simply accelerate ”.
“The number of conversations we have with customers keeps increasing,” he says. “People are making their first self-help allocations in China.”