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Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.

It’s a common question that’s been hovering over the global investment landscape in recent days. In a word, I feel confident the answer is “no.” And a related question: Can China overcome its longer-term debt and capacity problems? I think the answer there is probably “yes,” if given enough time. Let’s have a closer look at this still-evolving situation.

My overarching conclusion: This is not China’s Lehman

The recent high-profile debt woes of China’s second-largest property developer have riled global markets and sparked widespread fears of a brewing systemic crisis that could spread from China to the US and the rest of the world. I suspect those concerns are overblown and largely unfounded. In fact, I believe the risk of a systemic Chinese crisis with contagion potential is…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

As China’s role on the world stage continues to loom larger, many investors are contemplating whether to separate the country from the rest of their emerging markets (EM) equity allocation. Most arguments for such separation are based on China’s fast-growing weight in broad EM equity benchmarks, but it’s not necessarily that simple. Let’s take a closer look.

The answer? It depends

We believe the key decision point here should not be China’s dominance of the EM indices, but rather, the extent to which a stand-alone China equity allocation can be viewed as similar (or dissimilar) to an EM ex-China equity allocation. If they are, in effect, more or less the “same thing,” then the relative size of one to the other will likely make…

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Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore
Cara Lafond
Cara Lafond
CFA
Multi-Asset Strategist
Boston
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

In light of some notable events over the past several weeks — China’s domestic regulatory actions, the Biden administration’s recent six-month milestone, and the US foreign policy debacle in Afghanistan — I thought now would be an opportune time to provide my latest take on the state of US-China relations.

Putting regulation in context

As many of my colleagues have observed, the recent regulatory moves by Beijing are mainly China-focused and not driven by global geopolitics or US policy shifts. That being said, there are some key takeaways here from my broader geopolitical perspective. For example, I think policymakers in both China and the US have begun to view their domestic policy decisions through the lens of the rising “great-power” competition between…

I believe that regional differences in COVID vaccination rates, government policy goals, and the ensuing trade-offs have led to a global economy that can now broadly (and imperfectly) be divided into three distinct ”blocks,” each moving at very different speeds and via very different catalysts: 1) the ”boosters”; 2) the COVID “racers”; and 3) the ”reformers” (Figure 1).

In my view, investors should track the dynamics of each block separately in order to successfully navigate the current phase of the global economic recovery. All three will also affect the markets to varying degrees and with varying effects.

Figure 1

The three blocks of the global economy

Block 1: The ”boosters”

The countries in this group have made substantial progress on vaccine provision, which has increasingly allowed them to…

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Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

On 23 July 2021, Chinese regulators announced sweeping changes to China’s after-school tutoring (AST) industry, forcing AST companies to transform into nonprofit entities, banning foreign capital flows into the industry, and barring public stock listings for these firms. Following the announcement, the market capitalizations of China’s largest AST players plummeted to around 10% of their trailing 12-month highs.

But take a step back for a moment: Government regulation of Chinese industries is not new by any means. The AST policy move is consistent with the goals of China’s past regulatory actions and had even been foreshadowed through various channels during the first half of 2021.

Here’s a distillation of our China and emerging market (EM) equity specialists’ latest views on this turn of events — including why investors shouldn’t…

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Graham Proud
Graham Proud
Investment Director

The Chinese government’s aggressive regulatory crackdown on the country’s private technology companies (most recently, the online education sector) has shaken investor sentiment toward a range of Chinese assets, causing China’s equity and bond markets alike to swoon in recent days. The crackdown comes as Chinese policymakers embark on the delicate balancing act of redefining the role of private enterprise in China, versus the often-competing objectives of the nation’s common prosperity and social responsibility.

Here’s a distillation of our global fixed income and emerging markets debt teams’ latest views on some of the potential investment implications.

Fixed income investment implications

China equities and sovereign bonds, along with the Chinese currency, abruptly sold off in unison following the government’s latest regulatory actions during the week of July 26. But most Chinese household wealth is still mainly invested in…

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Jitu Naidu
Investment Communications Manager
Boston

A key pillar of my largely favorable outlook for China, including potential asset-price outperformance, lies in my directional view on the Chinese yuan (CNY). I continue to believe the CNY is likely to appreciate, or at least remain stable, over the next 12 to 18 months and beyond. Indeed, I think one of China’s challenges over the next few years will be how to contain its ongoing currency strength, rather than how to defend against currency weakness.

Here are the five reasons why I’m still bullish on the CNY.

1. China’s relative interest-rate differential is near the top of its historical range and may stay elevated going forward. For example, the spread between China’s 10-year government bond yield and that of the 10-year US Treasury note was recently at a decade-long high. As a result, I expect Chinese fixed income assets to…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

Over the years, we have performed extensive on-the-ground research to understand consumer behavior across China and other emerging markets (EMs), with an emphasis on the two age demographics — millennials and Generation Z — that fuel much of these countries’ total consumption. This is part of what we call our “grassroots” research process.

In keeping with this tradition, we recently conducted our second post-COVID-19 survey of Chinese consumers to get the pulse of consumption and lifestyle trends in the wake of the global pandemic. We targeted respondents in higher-tier Chinese cities, between 20 and 40 years old, with…

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Based on the most recent available data, March 2021 was the first month ever in which Chinese imports exceeded US imports (Figure 1). China was already the world’s largest trader overall (imports plus exports), but this latest development now also makes it the largest source of both global demand (imports) and global supply (exports). This is a notable milestone and perhaps another step toward China eventually surpassing the US as the world’s biggest economy (which, as I observed in my February 2021 blog post, could occur as early as 2028).

The strong import number, together with a weaker-than-expected export number and the potential for further export weakness as the world normalizes, could put some near-term pressure on…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

The forex (FX) 1 market volatility experienced amid the COVID-19 crisis in 2020 has not entirely dissipated through the first four months of 2021. An improving economic backdrop, along with recent rises in US inflation expectations and interest rates, have somewhat altered global currency dynamics. Here are the latest views from members of our global fixed income platform.

At a high level

As of this writing, we continue to see the most attractive global currency opportunities in non-dollar crosses. 2 Supply bottlenecks worldwide and pent-up consumer demand will likely support developed market (DM) trade and commodity-linked DM currencies, while continued US economic outperformance and concurrent higher US yields could pressure select high-beta currencies in the…

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Jitu Naidu
Investment Communications Manager
Boston

I’m often asked lately: Why are you so bullish on emerging markets (EM) equities these days? What makes the story so compelling, and what’s driving it? Let’s take a look, and while we’re at it, I’ll share my latest thoughts on China’s burgeoning A-share market. 

A flood of liquidity, a sprinkle of taper

I believe the broad opportunity set in EM equities is particularly attractive today, fueled in part by the unprecedented amount of liquidity in global markets. China’s was the first EM central bank to begin tightening monetary policy. In the US, real interest rates moved unexpectedly higher recently, which has led to some market tension within EMs between prospects for stronger global growth and whether or not higher real rates will persist. Brazil and Russia are also…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

More than two months into the Biden administration, some important contours of the post-Trump approach to US-China relations have begun to crystallize.

The president’s foreign policy team is coming together (including key positions for US-China policy), US military strategy is becoming clearer, and supply-chain management is a growing area of concern. Meanwhile, government reports released earlier this month — on artificial intelligence, trade policy, and national security priorities — have helped to better define the administration’s thinking on…

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Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

Several of my 2020 blog posts have explored China’s thriving innovation ecosystem and rapid transition to a digital economy — a hugely important investment theme for sure, but I’d like to shift gears this time to the subject of Chinese debt and domestic consumption.

Our internal investor dialogue around China has raised a number of provocative questions. One of the best ones asked recently was: Will rising debt ultimately derail Chinese consumption? The short answer, in my view, is no.

On the topic of debt, some of my colleagues have studied China’s consumer debt and concluded that the pace at which it is growing looks unsustainable in the long term. I tend to…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong
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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

I won’t spill much ink here trying to convince you that China is indeed “doubling down” on digitization and on its commitment to becoming a digital economy. You probably already know that, as do many other investors. And I’ve discussed it at length elsewhere, including in a few of my blog posts earlier this year:

We know also that many Chinese logistics companies, automation firms, software-as-a-service (SaaS) providers, and others are likely to benefit from China’s “enthusiastic plunge into a digital economy,” as I’ve described it. Whether or not some of these investment opportunities are already priced in is…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

Over the years, we have done extensive on-the-ground research to understand consumer behavior across China and other emerging markets (EMs), with an emphasis on the two age demographics — millennials and Generation Z — that drive much of these countries’ total consumption.

In keeping with this tradition, we recently conducted our first post-COVID-19 survey of Chinese consumers. As everyday life begins to return to normal in China, we wanted to get a pulse on consumption and lifestyle trends in the aftermath of the pandemic. We focused on respondents in higher-tier Chinese cities, between 20 and 40 years old, with “middle” incomes of 50K – 70K renminbi per year. Here’s some of what we learned.

Spending vs savings

Unlike their predecessors, post-1980 generations in China are generally prosperous and tend to spend much of what they earn, with an eye toward enjoying life as much as possible. However, with COVID-19 affecting their lives in ways they have not experienced before, we wondered if…

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Liliana Dearth
Liliana Castillo Dearth
Equity Portfolio Manager
Singapore

China recently reported that its gross domestic product (GDP) shrank 6.8% year over year in the first quarter of 2020 – the first time in modern history that the nation’s economy has contracted. The contraction was sharper than our tracker had suggested, with the implication being that services (for which robust monthly data are not available) likely fared worse than other parts of China’s economy.

Headline: Bad, but expected

This outcome was largely intuitive and did not come as a surprise to markets in the wake of recent events. Indeed, it’s pretty clear that the COVID-19 outbreak delivered an unprecedented shock to China’s economy – one that hit the services sector harder than it did manufacturing.

On its own, I would have thought that such a poor headline GDP number would have been neutral for Chinese fiscal policy, in the sense that whatever the government did for the remainder of the year, it probably wouldn’t be able to…

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Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong
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