In conversation with Eric Robertsen: Looking to China for Investment Growth and Stability
Corporate treasurers and CFOs have played an instrumental role in their organisations throughout the COVID-19 crisis, supporting the business through access to liquidity, managing credit and financial risks, and helping to bolster supply chains. While these challenges have not disappeared, treasurers have largely put in place strategies that allow them to think ahead. Consequently, many treasurers are now thinking about what the ‘new normal’ means, whether operationally, or in managing the very different risk and liquidity dynamics to those that we saw pre-crisis.
Corporate cash balances continue to rise, but at the same time, yield-bearing investment opportunities are more limited, with zero or negative interest rates in many major markets. Consequently, China is becoming an increasingly attractive destination for global investors, with positive bond yields, a stable currency, and sound monetary and fiscal policies, in spite of the COVID-19 crisis and geopolitical tensions, most notably with the United States.
China’s crisis response
China has been an outlier during the COVID-19 crisis in many respects. When the virus first took hold in the country, the authorities responded quickly. Suppressing the spread of the virus came at a significant economic cost, but it also meant that China could start returning to normal life relatively quickly. Although the economy and supply chains were impacted during the first quarter of 2020, with dire predictions of the long-term impact on global supply chains, these are recovering, albeit still affected by the fall in demand. During the first quarter of 2020, China suffered an economic slump of 6.8%, growth recovered to 3.2% in the second quarter (source: China’s National Bureau of Statistics).
Eric Robertsen, Standard Chartered’s Global Head of Research and Chief Strategist explains,
“The combination of rapid recovery in both the economy and increasing, albeit slowly, consumer confidence, a neutral monetary policy and an expansion in its fiscal policy means that China is able to focus on domestic jobs and infrastructure, which bodes well for the future. Although China’s ageing population brings challenges, the commitment to lift urbanisation levels in China means that there is still potential to attract labour from the countryside to the cities to increase productivity, adding further confidence both in China’s medium-term economic potential and the buoyancy of its domestic consumer base.”
Despite positive economic momentum in China, this is often overshadowed by concerns around geopolitical and trade tensions with the US, and the impact of the forthcoming United States elections on China – U.S. relations. China’s economic growth differential with the U.S. and many other parts of the world remains substantial. To the surprise of some analysts during the early stages of the COVID-19 crisis, China’s current account has been in surplus.
“At the same time, and in spite of ongoing trade tensions and a difficult year for emerging markets, the RMB has performed well, appreciating by 2.5% against the USD in 2020 so far in spot terms, and 4.5% in total return terms. This compares with the USD, which has been largely unchanged year to date, in spite of extraordinary volatility in the early part of the year. Solid currency fundamentals as well as sound monetary and fiscal policies, have contributed to the appreciation of RMB, which is likely to persist, barring a further increase in geopolitical tensions. For corporations with operations in China, who have often struggled to repatriate, and exchange funds held in China into the home currency, it therefore becomes more attractive to hold funds in-country to invest locally.”
At a time of zero or negative interest rates elsewhere, 10-year bond yields in China have increased by 65bps between May – October 2020 and have remained at a similar level since the start of the year. In contrast, bond yields in most developed bond markets have collapsed on fears of an economic slowdown. The difference between China’s bond yields and US Treasury yields is now the widest it has been in over 20 years.
The Chinese bond market continues to see record inflows from global investors who are attracted by the yield spread and stable currency, despite concerns around geopolitical tensions. Total inflows have increased by 94% year on year to RMB 604bn (to October 1st, 2020) exceeding full year inflows in 2019 (RMB 478bn), 2018 (RMB 558bn) and 2017 (RMB 375bn).
As well as becoming more attractive for global investors to participate in the Chinese bond markets, it has also become more accessible. Bond Connect was launched in 2017, enabling both Chinese and global investors to trade in each other’s bond markets through a market infrastructure linkage in Hong Kong. When Bond Connect was first established, its primary interest was for Chinese investors looking overseas; today, it provides a vital link to the Chinese market. Over 2,100 investors are registered, with an average of RMB 19 billion in daily trading volume in September 2020, and over RMB 28 trillion in Chinese Interbank Bond Market holdings¹.
“Some of the challenges that have dissuaded global investors in the past are receding. The China Foreign Exchange Trade System (CFETS) has expanded the range of tools available to hedge currency risk, and although the repo and derivatives markets are less mature than other markets, this is changing, and is of less concern to investors seeking longer-term investment yield.”
A growth destination
As the world looks to the forthcoming presidential elections, trade tensions between the United States and China remain an area of concern. However, the degree of mutual reliance between China and other western economies is likely to mean that the risks of a trade war escalating are less severe than some commentators may suggest. China remains dependent on the west for energy and semiconductors, while Chinese technology is increasingly embedded in western countries’ infrastructure. While political pressures could create some disruption, China’s sound economic fundamentals make it an attractive growth destination both financially and strategically. Foreign direct investment (FDI) flows from the US to China also increased by 6% during the first half of 2020², while the ‘negative list’ of industries that are closed to foreign investment was reduced from 40 to 33. Consequently, China’s appeal is expanding to a wider range of industries, and their treasurers, as they seek to balance their liquidity, security and yield objectives.
“With governments around the world experiencing an unprecedented increase in debt-GDP ratios, zero or negative rates, and a loss of consumer confidence, China is further ahead in its recovery, and therefore better placed to re-energise businesses and stimulate employment. While it is difficult to predict future GDP figures, China has significant untapped growth potential. This is a powerful combination alongside maturing markets and growing investment opportunities, from which many corporates may benefit.”