April 14, 2021

Investors return to China

Ray Dalio Bets on China! (Bridgewater Associates Q3 13F Filing)

Investors return to ChinaInvestors return to China

China’s coronavirus infection rate has slowed, and fund managers have a growing interest to start buying Chinese assets again.

New York-based investment company Pinebridge Investments is going all-in. At the end of last year, the company managed assets totaling $ 101.3 billion, including $ 25.5 billion in shares and $ 64.3 billion in fixed income..

«We recently increased our stake in China A from a small starting position in single digits to a low double-digit weight, ā€¯Michael Kelly, head of Pinebridge’s worldwide division, told CNBC. – As a result of COVID-19, the West is now experiencing a sharp economic decline at least (in the second quarter), while the East, led by China, is already full of companies showing a recovery».

«April macro data will clearly be better for China, he said, when the dip in the West is of unknown duration.».

Pinebridge is not alone. UBS Asset Management launched a new exchange-traded fund (ETF) at the end of February that is bringing it to the Chinese stock market. ETFs track benchmarks just like mutual funds do, but they trade more actively like stocks.

Without commenting on the launch of the ETF, Calvin Tay, Regional Director of Investment at UBS Global Wealth Management, said he was optimistic about China. According to him, coal consumption and real estate sales are almost 80-90% higher than previous levels, and the labor market is becoming more active..

«An estimated 40% of MSCI China’s shares are technology-related, he said, referring to an index that tracks stock trading in Shanghai and Shenzhen. – These sectors are much less vulnerable to a slowdown in economic growth as a result of the COVID-19 pandemic. We expect the virus to have long-term impacts in areas such as U.S.-China trade, global supply chains, digital infrastructure, and autonomous migration.».

Chinese President Xi Jinping gave strong signals to support growth at a Politburo meeting last Friday, Goldman Sachs said.

Goldman Sachs report says China’s policy is to stimulate demand while stabilizing employment, trade, financial markets and foreign capital.

«China’s largest market is China, says Pinebridge’s Kelly. – A high savings rate will allow some time to recover. It is obvious that China’s exports to the West will not grow for some time, but the slow and steady growth of local demand can close the gap».

Analysts see opportunities in infrastructure-related topics in China such as 5G communications, semiconductors, and healthcare. China’s government spending, which accounts for 1% of gross domestic product, lags 10% behind US levels. But China is expected to do more in terms of fixing disrupted supply chains.

Not only Pinebridge stock traders, but also fixed income traders are also buying China.

Arthur Lau, co-head of Emerging Markets Fixed Income Instruments, said he likes state-owned investment-grade public utilities and financial services companies that are defensive in commodities..

In a riskier, high-yield space, where companies are considered to be at high risk of default, Pinebridge prefers the real estate sector. Loans are available at lower rates, cash flow appears to be robust in this sector.

Rob Subbaraman, head of global macroeconomic research at Nomura, believes the Chinese yuan will become one of the world’s most important reserve currencies. «It’s only a matter of time», – he said.

The coronavirus pandemic could accelerate this process, as can the People’s Bank of China if it fulfills its plan to become one of the first central banks to introduce digital currency..

But all this suggests that China has not yet emerged from the risk zone.

«Many risks and challenges remain, including a second wave (COVID-19) as restrictive measures ease», – said Subbaraman.

Other risks he cited include a drop in exports of at least 30% year-on-year in the second quarter, rising debt defaults – especially among developers who have less access to offshore USD-denominated finance – and a deepening geopolitical divide between China and the United States, which could lead to an escalation of economic war.