BlackRock expects Hong Kong to become the New York of China, with the internationalisation of the renminbi set to be “a transformational event” in the history of global financial markets.
The US asset manager sent a 35-strong delegation of portfolio managers to Hong Kong last week to underline its optimism about the growth prospects of the Asia-Pacific region relative to stagnation in the US and Europe.
It wasted no time in outlining the financial flexibility of Chinese consumers, who boast a household savings rate of 39% compared with 6% in the US, while real wage growth stands at 13% in China, against 0% in the US. Plus, China has a household debt-to-GDP ratio of 16%, against 94% for the US.
When combined with China’s fiscal position of strong economic growth and almost $2.5 trillion in foreign currency and gold reserves, it paints a compelling picture. Essentially, BlackRock was seeking to press the point that China’s potential far outweighs the relative shallowness of its capital markets.
Jeff Shen, head of Asian and emerging-market equity for the firm's scientific equity portfolios, says China is seeking balance and sustainability in terms of economic growth and the development of its financial markets.
He expects government policy and infrastructure investment to remain geared towards central and western China, which accounts for 61% of the population and 89% of the landbank, but only generates 42% of GDP. China, Shen stresses, needs to broaden its growth profile away from its east coast.
Furthermore, China’s quest for resources is likely to gather pace, with government policy geared towards tapping new energy sources, including natural gas, hydroelectricity, nuclear, wind and solar power. What’s required for the industry to flourish is central government support, credit availability and long-term commitment. “In other words, it is tailor-made for China,” suggests Chen.
He also highlights the rising prominence of the Greater China economic zone. China is, after all, the largest trading partner of both Hong Kong and Taiwan, as well as South Korea.
Shen expects China to utilise its trading partnerships as part of strategic moves to internationalise the renminbi, with Hong Kong growing in importance as an offshore centre.
Following liberalisations this July on the interbank transfer of RMB deposits in Hong Kong and the removal of limits on RMB exchanges by Hong Kong companies, the city is on course to become the most liquid offshore financial centre for RMB business, offering the widest range of RMB financial products.
According to the People’s Bank of China, cross-border trade settlement in RMB amounted to Rmb70.6 billion ($10.5 billion) in the first half of 2010. Although small, the trend has been increasing, and Hong Kong’s share was a telling Rmb53 billion.
But while BlackRock sees developed markets continuing to struggle economically, its global allocation team, headed by Dennis Stattman, has increased its exposure to US equities from 13% five years ago to 35% now. That places it on a par at 35% with Asia (ex-Japan) equities.
Strategically, Stattman favours investing in equities from a bottom-up perspective over fixed income, noting that government bonds do not pay holders for the long-term risk of inflation, whereas equity markets increasingly compensate for – and price in – risk.
He says there are a large number of global firms in the US trading at eight to 12 times earnings that pay good dividends. “They represent a good long-term entry point,” says Stattman.
But Rick Reider, formerly of Lehman Brothers and now BlackRock’s chief investment officer for fixed income, suggests there are sound investment opportunities in Asia’s fixed-income markets.
He expects the global scramble for yield to continue, given the low-interest-rate position of the US Federal Reserve and a US financial system in which companies and banks are flush with liquidity. Cash on the balance sheet in the US non-financial corporate sector hit an all-time high in the first quarter of 2010, nearing 6% of total assets.
Meanwhile the yield for US corporate high-yield bonds has sunk from over 19% in December 2008 to just over 8% at the start of this month. Over the same period, the yield for asset-backed securities has fallen from 10.4% to 1.8%.
Total US domestic credit market volume stands at $53 trillion, against nominal GDP of $14.5 trillion – meaning the US has a debt-to-GDP ratio of about 360%.
BlackRock believes economic growth in Europe over the medium term will be constrained by austerity measures, while it will be structurally slower in the US than it has been in recent history.
But Asia’s debt markets provide a bright spot, says Reider. While relatively small compared with those of the US and Europe, they present a picture of more robust growth and lower leverage. Asian fixed-income markets stand at about $4.6 trillion, with credit comprising about $1 trillion of that (excluding financials).
Reider forecasts that the region’s credit markets will increase 2.3 times by 2015, requiring $1.2 trillion in funding. This will primarily be driven by strong GDP growth, without assuming any increase in leverage. “We are going to get more product across Asia,” he surmises.
He describes the region’s public debt markets as still attractively priced, with funds dominating the demand for products from around the world, and he expects “profound growth” in the region’s convertible bond market.