Why China has become too big and distinct to ignore

Over the past 20 years, China’s economy has grown fivefold, and it now accounts for approximately 20% of the total global economic output and 30% of annual global GDP growth. Meanwhile, its equity market capitalization is 25 times larger, now close to 11% of the world’s equity market cap, and the market for China tradable debt securities has grown from USD $200 billion to USD $16 trillion. The Chinese renminbi has also evolved to become the world’s eighth most-traded currency as of 2019.

Yet many global investors are significantly under-allocated to China relative to its weight in global benchmarks, whether because of insufficient understanding of the investment opportunity and market complexity, or other factors.

Some of the most compelling growth opportunities in the world are originating in China, which is one reason we expect returns on Chinese equities and fixed income assets to be above their developed market counterparts in the coming years. China is striving to innovate and achieve technological self-sufficiency. Its R&D spending is growing twice as fast as the U.S, and it’s home to the largest stock of supercomputers and industrial robots. China has set the goal of achieving carbon neutrality by 2060, enabled by smarter infrastructure and leadership in battery cell technology for electric vehicles. China is also leading in the digital disruption of the retail and financial industries, accounting for 57% of the global e-commerce market, one of the reasons it is leading in the transition to a cashless society. The rapidly growing number of large, successful companies is just one testimony of this success. China is home to several of the world's largest tech companies and their number keeps growing.

The rising tensions between the U.S and China have created new risks, but it’s also possible that the two countries pursue distinct economic and technological models that prosper in parallel, occasionally in collaboration and at other times in competition. We think investors are well-advised to build portfolios resilient enough to withstand all possible outcomes. This means making allocations to Chinese assets that better reflect the country’s economic, political, and financial weight in a fast-changing world.

Incorporating Chinese assets into a global portfolio can provide meaningful diversification benefits because of its growing role as a disruptor and innovator as well as China’s domestically oriented economy and monetary policy that result in economic and interest rate cycles that sometimes diverge from global markets. Chinese equities and bonds have comparatively low correlations to global benchmarks. As a result, adding Chinese assets to global portfolios can increase the expected return and reduce the risk, based on the UBS Global Wealth Management Capital Market Assumptions.

There are risks to investing in China, including macro, regulatory, and geopolitical risks. Antitrust regulation has been relatively light-touch on the tech sector, but could become tougher for Chinese internet platforms. Delisting risk for Chinese companies trading on U.S exchanges has increased, but we believe more Chinese companies pursuing listings closer to home and strong investor interest in China can limit the market impact. Longer-term economic risks include the 100-percentage-point rise in the debt-to-GDP ratio over the past 10 years, and the shrinking working-age population. History suggests, however, that China’s policymakers have ample tools at their disposal to mitigate these risks.

The writers are:

Michael Bolliger, Chief Investment Officer Emerging Markets, UBS Global Wealth Management and

Arwed Christensen, Head Wealth Management Israel and Global Family Office Central and Southeastern Europe at UBS

 

 

 

Disclaimer:

This publication is intended for information only and is not intended as an offer to buy or a solicitation of an offer. Furthermore, this publication is not intended as an investment advice and/or investment marketing and is not replacing any investment advice and/or investment marketing provided by the relevant licensee which is adjusted to each person's needs.

It should be noted the author of the article and/or UBS Wealth Management Israel Ltd. and/or any of the UBS AG affiliated entities may have a special interest in the topics mentioned in the article, as defined in the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995.