Unlike in other parts of the world, China's economy is recovering very quickly, driven by strong domestic consumption. That, according to Kai-Kong Chay and Paula Chan of Manulife Investment Management, is leading to interesting investment opportunities in Chinese stocks and bonds, particularly in the ESG space.
While much of the world is currently tightening the screws again and tightening measures to combat the Corona pandemic, China's economy is on the fast track with growth prospects of 6 to 7 percent. Unlike other countries, China has indeed seen a V-shaped recovery.
"The current growth phase is primarily driven by domestic consumption. Online consumption in particular has been performing very strongly since the second quarter of 2020", Kai-Kong Chay, portfolio manager of Nordea's Chinese Equity strategy, explains. The Chinese middle class is getting bigger, he said, and disposable income has risen by about 52% in the past five years. Chay observes that this money tends to flow into services such as education and leisure rather than into areas such as clothing, food or tobacco: "Consumers want better quality services than those provided by the state, which opens up new opportunities for private providers. For example, online education has benefited greatly as a result of the lockdowns."
Chinese bond market lures with positive returns
With interest rates stable, concerns about excessive inflation fading, the renminbi strong and China's credit rating stable, Paula Chan, portfolio manager of Nordea's Renminbi Bond strategy, believes the risks for investors in Chinese bonds have been reduced. In addition, the fixed-income market is benefiting from inclusion in global indexes: "Currently, the share of foreign investors in the Chinese government bond market is around 6 to 7%. Considering the global index inclusion, we expect the foreign share to increase sharply and reach about 20% by the end of 2023." That's because, in contrast to the low to negative global interest rate environment, the Chinese bond market remains in positive territory.
Big opportunities in Chinese ESG bonds
China is the first newly industrializing country to commit itself to carbon neutrality by 2060; after 2030, annual CO2 emissions are to be continuously reduced. To achieve these goals, banks and financial institutions are now required to consider factors such as climate risks when making loans and to provide incentives for more sustainable business practices. In addition, according to Chan, more and more ESG bonds are being issued. "Currently, the ESG universe accounts for just 1.25% of the Chinese onshore bond market, so there will be great opportunities here in the future", according to the expert.
Overall, both Chay and Chan observe that foreign investors are increasingly flocking to the Chinese stock and bond markets. With good reason, as this could not only diversify portfolios wisely, but also provide a better risk/return ratio.