The gravity shift in asset allocation to China

If the world economy is a solar system, then China is at the heart of it. What does it mean for asset allocators?

Global allocation shift to China

If the world economy is a solar system, then China is at the heart of it;
Global monetary policy, consumer demand, and tech innovation are three of many fields where China's influence is profound and wide-ranging;
China is the source of a wide range of investible trends that are changing the world we live in;
A dedicated strategy to China is no longer a 'nice to have' as it offers investors greater potential to participate in China's growth story.

A dedicated China strategy is no longer a "nice to have"

1. China leads the world economy

If the world economy is a solar system, then China is at the heart of it. The gravitational pull from China's economy affects every one of us, and in ways we might not initially realize.

That's especially true when we think of 2019, because if the story of 2019 was looser global monetary policy and stronger stock markets, then China wrote it. That's because China made the first move to ease monetary policy in October 2018, which the rest of the world then followed.

And it's not for the first time, because China monetary policy was behind the post-GFC rebound in 2010, the upturn in global growth in 2016, and the subsequent slowdown in 2018.

We think this is both underappreciated driver of the past and an indicative one of the future where global monetary policy will increasingly be shaped out of the HQ of the People's Bank of China at 32 Chengfang Street in Beijing.

China contributes to one-third of global growth

Contribution to global growth (PPP, Intl $), 2019-2020

Source: IMF, April 2019

China's monetary policy drives global growth

China Credit Impulse (LHS) & G20 GDP Growth (RHS) (%/YoY Change), Q2 2008-Q3 2019

China’s credit impulse measures credit growth as a percentage of gross domestic product (GDP). It is a gauge of how easily businesses in China can get loans, a gauge of liquidity conditions in China.

Source: Bloomberg, Organisation for Economic Cooperation and Development, October 2019

Notes: (1) China's credit impulse refers to the change in the growth rate of aggregate credit in the economy to GDP, (2) G20 comprises 19 countries and the European Union. The 19 countries are Argentina, Australia, Brazil, Canada, China, Germany, France, India, Indonesia, Italy, Japan, Mexico, Russia, Daudi Arabia, South Africa, South Koria, Turkey, the United Kingdom and the United States.

2. Opportunities in China's stock and bond markets are too large to ignore

Both China's bond and stock markets are amongst the largest in the world and present investors with unique opportunities.

Restrictions on investor access to onshore China capital markets are becoming a thing of the past after the launch of Stock and Bond Connects. The success of this effort was recently underscored when key equity and bond indices increased their weightings of Chinese securities, which in turn will further increase already strong flows of foreign investment into Chinese assets.

China is the second largest bond market globally

China's equity markets are the 3rd largest

China is leading the equities market — World Federation of Exchanges, as of 31 December 2019

3. China is a technology and innovation leader

How is China innovating and developing cutting edge technology?

Chinese companies have rapidly increased their spending on R&D in recent years.

In part, that's because of government support, but it's also because of fierce competition in domestic markets which means companies have to constantly innovate to maintain a competitive edge.

And this R&D spending is feeding through into rapid growth in patent registrations. After starting from low levels in 2008, Chinese entities have ramped up patent applications and are on course to soon overtake the United States.

Patents are an important indicator because they measure how innovative a country is becoming and, crucially, that it is protecting its intellectual assets.

We believe China's commitment to innovation is something that all investors should bear in mind because it not only bodes well for China's long-term growth prospects, but will also create a range of investible ideas in China's tech sector.