China markets update

Key takeaways

• While mainland China's economy had already returned to the pre-Covid growth path by the end of 2020, more recently there has been a slowdown in the country’s economic activity. In Q4, we believe that more targeted monetary/credit support and effective fiscal implementation can be expected
• Although China’s weight in global indices has increased with index inclusion, China equities and bonds remain underrepresented in major global indices
• China is already increasingly becoming a leader in innovation on the global stage and is today the second largest spender in R&D – quickly narrowing the gap between itself and the US
• China remains the largest manufacturer and buyer of electric vehicles (EV) globally. Penetration rate of EVs in China has room for growth – EV penetration rate is expected to reach 16.5 per cent by 2025 from today’s 6 per cent ¹
• Green policies remain one of mainland China’s priorities, and various initiatives to meet commitments in peak emissions and carbon neutrality will result in an increase of green bond issuance
• China bonds continue to be an appealing asset class, offering a potential yield premium and low correlation to other major markets. Overall, we believe that defaults will rise moderately in the China credit market, but that the authorities will avert systemic financial contagion and avoid a sharp and unmanageable spike in defaults
• China A share equities remain underinvested and underrepresented in global portfolios indicating a lot more potential for inflows into the market. We believe that adding Chinese equities into global equity portfolios could serve to improve diversification and potentially increase returns over the long term

Note 1: Source: IHS Markit, June 2021.