Opportunities in Chinese equities and bonds

Despite slowing growth in China, fund managers believe investors can still find opportunities in Chinese equities and fixed income investments.

Schroders economist, David Rees, said the slowdown in growth was “healthy” and presented opportunities for active investors.

“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,” he said.

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Similarly, Andrew Pease, Russell Investments global head of investment strategy, said while emerging market equities had been “laggards” so far this year, the asset class would perform better in the second half as Chinese credit growth stabilised and vaccines became more available across emerging markets.

Schroders head of Asian and emerging markets credit, Angus Hui, said with the low interest rate environment, China’s opening of its bond market was 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,” he said.

“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.”

Hui noted Chinese corporate bonds had attractive yields and wider spreads with lower duration risk than other global credit markets.

“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 synchronised with other parts of the world, but influenced by conditions within China,” he said.

“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.”

Hui said investors should also expect more Chinese green bond issuances as standards had been 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,” he said.

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