Trade war won’t halt capital rush into China, say experts

China would continue to draw strong foreign inflows despite a prolonged spat with the US, delegates at AsianInvestor’s Southeast Asian Institutional Investment Forum heard.
Trade war won’t halt capital rush into China, say experts

With some of the world's largest asset owners increasing their allocations to China's bond market and others looking to invest in the country, the appeal of its capital market has so far not been dented by US-China trade tensions.

And even if Washington ups the ante by strong-arming US asset owners, there is good reason to expect that to continue, delegates on the first day of AsianInvestor’s Southeast Asian Institutional Investment Summit Forum heard on Tuesday.

“The US may move to stop US pension funds [investing] in China. But if you look at European pension funds, they are flooding into Chinese bonds,” Bo Zhuang, chief China economist at TS Lombard, said.

Bo Zhuang, TS Lombard

"European pension funds [can't] find anything else, [and] China looks relatively good, " he said. "And then also for bond portfolio managers, you need to find excuses in order to have zero weight on Chinese bonds, because you need to have a very strong story in order to be underweight for a considerable long period of time.”

Indeed, APG Asset Management, Europe's biggest pension investor with €528 billion ($581 billion) under management, launched its first China fixed income strategy on November 29, signalling its commitment to – and high expectations for – the country’s $13 trillion renminbi bond market.

The Dutch firm will directly tap the asset class by building a China fixed income team and has set up branches in Beijing and Shanghai. It has also chosen local firm E Fund Management to help it run the bond strategy, as it did for its A-share portfolio.


Speaking as part of the same forum panel in Singapore, Jonathan Armitage, chief investment officer at MLC Asset Management, said he was also convinced about the enduring growth story of China’s capital market.

“If you look over for the next 10 to 15 years, whether or not it's in equity market or particularly in the credit markets, you're going to see ... very significant changes as the Chinese economy continues to evolve and develop,” Armitage said.

Jonathan Armitage, MLC

“I think it's quite likely, maybe towards the end of my career, that the Chinese capital market will become significantly dominant. They certainly will be in this part of the world, and I suspect it will be from a global perspective,” he added.

AsianInvestor was unable to ascertain Armitage's age, but his company's website describes him as having 27 years of investment experience.  

Some US asset owners are also pushing back against political pressure. The Federal Retirement Thrift Investment Board last month rejected a request from a group of US senators to drop its investment in an MSCI index that includes Chinese companies deemed strategically important to China.

Some US pension funds are even considering dedicated A-share mandates. Washington State Investment Board in August told AsianInvestor it was close to completing a search for emerging market equity managers. As part of this process, the $135 billion plan will consider China-focused mandates, potentially with access to A-shares, a spokesman said. Its total allocation to China is $3.5 billion or 2.6% of its total assets under management. 


The forum panellists also talked about how they should best prepare themselves for a protracted trade war.

"It's very clear that the political consensus in Washington is absolutely in favour of taking a tough stance towards China. This will continue regardless of who wins the US election," Peter Mumford, practice head for Asean, South Asia and Pacific at Eurasia Group, said.

Peter Mumford,
Eurasia Group

So it's important for investors to hedge against the geopolitical risks, as well as take the chance to correct some of their investment biases.

Portfolio constructions are driven by scenario analyses, which should take into account a number of different scenarios, including both those that are beneficial to asset classes and those that are detrimental. These should be done more seriously in view of the trade war, Armitage said.

Others made similar points. “We can make educated forecasts about the future, but chances are we're not going to be 100% right. So very important is [having] a safety net [and] having a diversified strategic asset allocation, said Simon Coxeter, growth markets director of strategic research at Mercer.

The trade war and related aspects really help to expose the risks of having too many eggs in one basket. Some investors have a very large equity exposure to the domestic market, as much as 40% to 60% of their equity investments, he added.

Investors should re-evaluate the vulnerabilities in their home-bias equity investments to reduce the concentration risks, Coxeter said.

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