(ATF) An economic rebound, a booming stock market and healthy yield spreads over its bond peers is drawing investors to China as it becomes the first to recover from the pandemic.
“We have observed an A-Share sentiment change starting last week,” Wang Yi, head of Quantitative Investment at CSOP Asset Management told Asia Times Financial, while adding that CSOP’s ETF had also witnessed a sizeable inflow in that period.
“We observed sustained inflows for the recent quarter into A-Share through HK Connect. In the last week, the turnover exceeded 1 trillion yuan per day, which increased liquidity and valuations in the market.”
He said there were several fundamental drivers for these inflows.
The June PMI and other macro-economic indicators signalled a V-shape recovery of the Chinese economy. The central bank introduced several policies to help small and medium cap corporates financially, which would in turn help the banking sector.
Recent reforms in the ChiNext market also showed signs of continued opening up of the Chinese financial markets.
CSOP is one of the world's largest offshore Chinese asset managers.
Investor focus is also shifting as the Chinese economy increases its reliance on the domestic market.
Pictet Asset Management has added to its China A-share holdings, increasing its domestic consumption and “new infrastructure” exposure such as technology, data centres, life sciences and logistics.
First in, first out
“China is FIFO – First In First Out – for the coronavirus and is pushing hard for self-sufficiency,” Pictet’s senior investment manager Andy Wong said.
Consumption was not the only driver for increasing the exposure.
“China is working to promote its capital markets. This is part of the battleground for US-China strategic competition. In a world of strategic competition, trade war and tech war, capital market strength is a crucial enabler. Capital market advantage will become more and more of a battleground.”
Its $14 trillion bond market is still under-owned and this is seen to be changing rapidly as yield seeking investors pile into an economy which is recovering quickly.
And the recent sell-off has made the fixed income market even more attractive.
“The rise in CGB yields is due to a combination of factors – the economy is showing signs of life which has cooled some of the expectations of monetary easing. That has triggered a sell-off in a market predicated on PBoC wanting to channel funds to SMEs instead of bringing out a rate-cut bazooka. As the macro environment is supportive and the economy is showing signs of life, further easing may not be required,” Sean Darby, Jefferies & Co Global Equity Strategist told Asia Times Financial.
In a world of near zero rates and negative yielding bonds, China’s government bonds offer a healthy spread of over 240 basis points over US Treasuries sufficient to cover any currency weakness.
The yield on 10-year Chinese government bonds have risen to 3.1% from 2.5% in end-April, while the US 10-year bond yields have remained steady over that period, widening the spread.
“China’s yield advantage relative to the US, reinforced by the People’s Bank of China liquidity management that favours targeted rather than flood-like easing, is likely to attract bond inflows,” said Sim Moh Siong, a Currency Strategist at Bank of Singapore, which has turned positive on the yuan raising its 12-month forecast to 6.80 from 6.95 a dollar.
This week the yuan has already strengthened past the 7-mark with China seen as one of the few economies likely to grow in 2020.
China’s bond market has already been expanding at a breathtaking pace in the past two decades.
JPMorgan estimates it will grow to around $16.5 trillion this year or 112% of nominal GDP from just $200 billion or 18% of GDP at the turn of the century.
Following inclusion in the Bloomberg Barclays Global Aggregate Bond Index and the JPMorgan Government Bond Index, it is expected China will be added to the FTSE World Government Bond Index.
“These three benchmarks, even at their planned low inclusion weights, could draw potential additional inflows of between $250 billion and $300 billion into China’s onshore bond market,” JPMorgan’s Ian Hui and Chaoping Zhu said.
The flows that are being driven by the yield differentials could be sticky given the PBoC has used less ammo than the rest of the world, which would result in a more pedestrian rebound, rather than a turbo-charged recovery.
“The hesitancy to cut rates is to avoid repeating the mistakes of 2009/2010. The one advantage of that is it will be a lot easier to reverse these measures. The approach has been to inject a lot more moral suasion into the system,” Aidan Yao, senior emerging Asia economist at AXA Investment Managers told Asia Times Financial.
Property market reflated
He added that Beijing had reflated the property market and that has had the effect of putting a safety net around credit markets.
“There is healthy pragmatism – instead of throwing in the default option or unemployment risks into the system, they have moved savings into the market to allow solvency crisis control,” he said.
China’s domestic equities, one of the best performing markets in the world, are seen extending their gains on the strength of flows.
Macro research firm BCA Research said the breakout of the CSI300, mainland China’s equity benchmark, which rose above its January 2018 peak this week, has room to run.
It said China’s smart recovery from the pandemic, the PBoC willingness to ease monetary and credit conditions further to arrest any remaining deflationary pressures and US’s muted response to China’s National Security laws in Hong Kong were some of the factors behind their optimistic appraisal.
“China’s credit and fiscal impulse will rise higher in the coming quarters, which will lift earnings per share and keep the equity risk premium at bay,” the macro research firm said in a report.
Morgan Stanley raised its assessment of Chinese equities, this week.
“A Chinese equity bull market is building with rising volumes amid improved earnings visibility and liquidity, plus regulatory/policy support,” it said in a report.
“We raise targets for all covered indices and still expect A-shares to outperform,” they said adding that A-shares are benefiting from strong new fund launches and rising retail investor account openings amid regulatory support and an ongoing market reform push.
Morgan Stanley said the expected marginal weakening trajectory of USD/CNY also supports a preference for A-shares to cushion negative translational effect.