SWFs expect China to win post-Covid economic Cold War

Increasing polarisation between East and West leaves China in the economic driving seat, according to a new IFSWF and Invesco report.
SWFs expect China to win post-Covid economic Cold War

As tensions between China and the US are likely to dominate the post-coronavirus economic landscape, 60% of sovereign wealth funds believe that the Chinese economy will recover not just more quickly but also more fully than other major economies.

This is the conclusion of a new reportThe rise of a bipolar world: sovereign wealth fund views on the global macro outlook – published on Tuesday (July 28) by the International Forum of Sovereign Wealth Funds (IFSWF) and investment manager Invesco.

The survey of 24 sovereign wealth funds concluded that because China was struck by the Covid-19 pandemic earlier than other countries, it has come through the worst of it and now stimulus may gain more traction as lockdown measures are eased and confidence recovers.

Victoria Barbary, director of strategy and communications at the IFSWF, told AsianInvestor that this strategy had built confidence among the funds.

“A lot of sovereign wealth funds, particularly the larger ones, have invested a lot in getting to know China as a market,” she said.

Although 71% of respondents believe that the US dollar is likely to remain the favoured international currency, around a third of respondents said they expected the renminbi to increase its share of global official foreign exchange reserves, as well as its share in trade invoicing going forward.

For Rod Ringrow, head of official institutions at Invesco, this was not a surprise.

“There has been a general trend for the renminbi to become part of a wider reserve basket,” he said. “Given that a number of the sovereign funds are obviously doing bilateral deals together, and talking together, I think there’s certainly discussion as to how the RMB can play a greater role in the global trade and in global reserve allocation.”


The theme that runs through the report is that sovereign wealth funds expect the short to medium-term to be dominated by an increasing polarisation between East and West.

Over two-thirds of respondents (67% and 71% respectively) believe that emerging economies and Asia are likely to align themselves with China.

This is based on the fact that 86% of respondents believe that China will continue to open up its economy.

What is likely to bring this East/West split into sharp relief is what the report calls “the most important political event of 2020”, in other words, the US presidential election in November.

Respondents were split 50:50 in terms of who they thought would win the election, though it is worth noting that opinion polls have shifted considerably since the survey was conducted at the end of June.

It should be no surprise that 90% of respondents believe that a second term for Donald Trump will result in a more unilateralist or isolationist US, but 42% believe the same of Joe Biden.

“The legacy of things like Black Lives Matter and MAGA… means that it’s going to be very difficult for Biden totally to change around,” explained Barbary.

Where this leaves the European Union is, as the report says, “caught in the middle of the bipolar tussle”; split on whether the EU will align with the US or hedge its relationship between the US and China.

But Ringow characterises this result as diplomacy on the part of the sovereign wealth funds, unwilling to commit to one side or the other.


Although sovereign wealth funds do expect to see a couple of bumpy quarters ahead, their investment strategies are different this time from the last financial crisis. Rather than chopping and changing every few months as they did then, now they are holding a steady course.

“We are now seeing a much longer-term, sticking-with-the-strategy-approach than we did then. It shows how far this investor group has changed in the past 10 years,” said Barbary.

It was clear in the IFSWF Annual Review 2019, published in June, that sovereign wealth funds have positioned their portfolios over the past three years to invest in defensive sectors such as healthcare, infrastructure and technology – all sectors which have proved more resilient to the Covid-19 crisis.

The same approach appears in this survey.

“It shows more maturity on the part of the funds,” said Ringow.

“Subsequent to [the 2008/2009 financial crisis] sovereign wealth funds have developed better risk management systems, better liquidity management systems, and are therefore better able to weather the storm, that’s around them at the moment,” he added. 

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