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The writer is group chief investment officer at Amundi Asset Management
Chinese stocks have had a tumultuous year as a wave of tighter regulation has shaken technology, education and gaming stocks.
Yet, the big picture appeal of China for investors remains unaltered. Individual stocks have suffered grievous sell-offs and the faith of some foreign investors has been tested by the sector crackdowns.
But assets in China will regain their allure once they are viewed in the context of how Chinese monetary policy is evolving compared with what is happening in the US.
Financial markets in the US remain propped up largely by central bank liquidity, which can no longer be relied upon as inflation gathers pace. The uncertainty over how this dynamic will end will increasingly hang over US growth stocks.
In contrast, we believe China’s pursuit of its strategic goals will continue to spur the rise of the country in investor portfolios.
These include the rebalancing of China’s growth engine — from exports to domestic demand — with an emphasis on supply chain independence and security. Even the current regulatory pressure should be seen as a tool to boost competition and reduce systemic risks, both of which are vital for attracting capital.
The internationalisation of the renminbi as a currency for trade, capital, reserves and savings is also key for investors. At the outset of the pandemic, China resisted the temptation to embark on unorthodox monetary and fiscal experiments.
This was in marked contrast to the US, which experienced the greatest central bank-governmental intervention of all time, upending all tenets of financial discipline. For its part, China has remained ready to support its economy but in ways that safeguard its currency.
Notably, in Asia, the renminbi is taking on a role similar to that of the Deutsche Mark in Europe four decades ago. While there is no official fixed rate, there is effective monitoring by central banks of the levels and volatility of most regional currencies versus the renminbi. This nascent Asian currency bloc will provide some insulation from US-related headwinds, and further strengthen commercial ties within the region.
The upcoming round of asset purchase tapering in the US by the Federal Reserve, in the face of rising inflationary pressures and an upward push on interest rates, could also promote renminbi internationalisation, as emerging economies and investors in general seek to reduce their addiction to the US dollar.
Indeed, about 30 per cent of central banks worldwide are planning to raise their allocation to the renminbi in the next couple of years. Yet another sign is the announcement, at the end of July, that the People’s Bank of China will support Shanghai’s trial to facilitate the free exchange of the renminbi. For investors, there are three implications.
First, Chinese assets, cash and government bonds in particular will probably be the main haven for positive real returns in the foreseeable future.
This is because the recent hyper-Keynesianism in the US carries its own price tag in terms of rising inflation, currency devaluation and a higher risk premium. For investors, the preservation of purchasing power per unit of risk will be the name of the game in a more inflationary world where real returns will matter most.
Second, the greater autonomy of the Chinese business cycle will provide better diversification benefits and exposure to areas of higher future growth.
The development of the middle class and domestic consumption may help reduce China’s dependence on global trade.
Advances up the manufacturing value chain via innovation will provide opportunities in strategic sectors such as semiconductors, artificial intelligence, quantum computing, clean technologies, industrial automation and robotics.
Chinese growth stocks are largely internet giants at present. As local champions develop out of this local innovation drive, a broader set of growth companies will be available for investors looking to diversify risks.
Third, global investors will probably view the renminbi as both a store of value and a medium of exchange.
As the second-largest holder of US Treasuries in the world, China has little interest in precipitating a disorderly slump of the dollar. But as China becomes more independent, this vestigial financial link will give it extra bargaining leverage in future negotiations on trade and tariffs.
There are sound reasons for investors to embrace a gradual “go it alone” approach to Chinese assets. As the Chinese saying goes, “All things are difficult before they are easy”.
Unhedged — Markets, finance and strong opinion
Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday