Why China Matters
China matters. Even if you aren’t even considering allocating to Chinese assets. What happens in Beijing can affect your portfolio wherever it is invested.
The most notable aspect of the Chinese stock and currency market correction over the summer of 2015 was not, perhaps, the scale of the losses or the government’s $200 billion intervention. Rather, in our opinion, the shockwaves that reverberated around the globe defined this turbulent period. Following the onshore stock exchange crash and Beijing’s 3% devaluation of the renminbi, the value of south-east Asian currencies plunged, oil prices crashed to a near-six-year low and stock markets across the developed world sustained heavy sell-offs as investors ran for safety.
For the past five years or more China has been rebalancing to make consumption a bigger part of the domestic economy than investment, and services a more important driver of growth than manufacturing. For us, the sharp reaction to further evidence that it was not going as smoothly as planned highlighted the fact that many investors have not understood the process and the challenges it represents.
But this process is only just beginning. We are embarking on a new era in global markets; it is likely to be one that has China’s increasing integration into the global financial system at its core.
Foreign investors have historically had limited access to the Chinese market and little visibility on Beijing’s policy-making processes. Consequently, they are likely to find it difficult to discern the broader impact of the internationalisation of China’s currency and capital markets and the meaning of monetary and fiscal policy moves.
One thing that has become clear, however, is that whatever Beijing’s policy response to steering the country through its major economic and financial transitions, it is not going to be familiar. China is choosing to experiment to find the right solution. Instead of taking a top-down, ideological approach, Beijing has adopted a more pragmatic attitude, making small regular adjustments to various policy levers to find out what works, without huge implications. As recent experience demonstrates, the entire world has an interest in the result.
With this journal, we hope to leverage our experience in greater China to add to your insight of this rising power. China may not be a natural investment destination for many asset owners in the near term, but this is likely to change in years to come. We believe our clients need to be familiar with the impact that decisions made in Beijing will have on their portfolios in the future.
Wherever you invest, whatever assets you hold, it is our view that developments in China will have a significant influence on global financial markets. We look forward to partnering with you on this journey.Hendrik du Toit
Chief Executive Officer, Investec Asset Management