Webinar: Investing in China — balancing growth & risks

China benchmark indices have been underperforming other markets in the past year, with concerns around regulation and China’s real estate market debt looming in the minds of investors. Does the long-term growth story of China justify the regulatory risks involved when investing in the Chinese market?

Join experts from Endowus, BlackRock and Neuberger Berman as they discuss their assessment of China’s volatility and also their firms’ investment strategy for the China Fixed Income space in the near future.

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00:00 - Introduction to the panelists from BlackRock and Neuberger Berman

07:00 - An introduction to the Endowus China Fixed Income Portfolio

10:30 - Panelists’ company introductions

15:40 - What is your investment strategy in the China Fixed Income space?

33:05 -  What is your view on the Chinese property market?

56:29 - How do policies around common prosperity affect China’s macroeconomic landscape?

1:03:40 - What are some growth opportunities that green financing can bring to the infrastructure sector?

1:09:27 - Live audience Q&A

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Excerpts from the webinar

What is your investment strategy in the China Fixed Income space? (15:40)

Peter: “Common Prosperity” is a long term goal for at least the next 30 years and is a major China economy re-orientation. Monetary policy is likely to turn more accommodative to support the economy. Easing monetary policy and easing credit conditions are to support the economy next year. In an environment where liquidity is aplenty, this bodes well for bond and equity markets. Because of this, there is some preference for onshore credit over offshore credit, as China’s government is starting to ease monetary policy, however, offshore credit, which is more dependent on the U.S. Fed, is starting to tighten.

‍Peter: Our philosophy on the Neuberger Berman China Bond Fund is to emphasize on the total bond return. We emphasize capital preservation, seeking downside mitigation and low volatility to make stable returns.

‍Corwin: There are 2 key factors driving the China Fixed Income markets. First, there is a policy diversification in strategy for US and China monetary policy. Secondly, on the current levels of yields and how that affects these markets, these factors drive the attractiveness of the China fixed income market at present. Firstly, there are expectations of higher interest rates in the U.S. as we move to next year. Higher interest rates mean lower bond prices and potential losses in the portfolio. Secondly, as China recognizes a downward trend in the economy, their turn in policy is clear with the recent cut in the reserve requirement ratio, freeing up capital and injecting liquidity into the system.

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What is your view on the Chinese property market? (33:05)

‍Corwin: When we think about this solution that Endowus has created, which is a combination of the BlackRock fund and the Neuberger Berman fund, what you get is a quality portfolio with predominant exposures to investment grade credit. The duration, which is the sensitivity of the portfolio to interest rates, are at quite low levels at about two to three years and this broader investment grade tilt means that we are able to keep the exposure to property quite muted. Exposure in the Blackrock fund right now in terms of US dollar denominated higher high yield bonds and particularly in the real estate sector it is closer to the 8% level. This creates a good optionality for the strategy given the very attractive valuations we see now in china higher property while still is achieving a very nice diversification to keep volatility low. I definitely recommend for investors to stay invested in china but at the same time maintain a diversified exposure stay up in quality and I definitely feel that the Endowus solution does present very well in this context.

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How do policies around common prosperity affect China’s macroeconomic landscape? (56:29)

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Peter: The goal of common prosperity really for sustainable growth because of the problems of the wide rich-poor gaps right now. There may be social uneasiness and this can threaten the high growth economic model. That's why China is committed to achieve sustainable growth for the next 30 years and perhaps even for longer. You need to have the right policy changes, but the cost to achieve common prosperity is quite high. However, the cost you pay is for it to make the growth much longer and more healthy so that society can become more stable. Carbon neutrality is also a common goal because in order for people to have a better life, it’s not just about being rich, but also having better air, clearer water. The China government is willing to sacrifice the growth a little bit but try to prolong it instead.

‍Corwin: What has really changed over the past 18 months to two years or so is this shift to a multi-pronged policy objective across both economic growth and environmental outcomes for common prosperity. All of it came all at the same time where the bureaucracy struggles to adapt to this multi-prong approach, which is why you end up in situations where a particular agency becomes too fervent when it comes to environmental constraints, resulting in near-term power shortages which we saw recently. But the one positive thing that we can all observe here is how quickly the Chinese authorities can correct some of these near-term hiccups. We're starting to see a bit of that from a top-down policy standpoint.

‍Corwin: It's very clear that there's now a near-term shift in the policy tone from both the Politburo and also from the people's bank of china recognizing that this shift towards a multi objective multi-policy objective has led to downward pressures on the economy including from the property downturn. It also increases the odds of a near-term small policy cut in policy rates. That said we don't expect big cuts in the policy rates and it's more of a signal to banks and to reduce our lending rates. So overall, we can see that the policy has shifted towards a more accommodative stance with the goal of reducing financing costs on banks and to help boost the bank's balance sheets encourage more lending to smes to support the growth and especially with recent recognition around this downward pressure on the economy and also to ensure that liquidity is sufficient moving to Q1 of next year.

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What are some growth opportunities that green financing can bring to the infrastructure sector? (1:03:40)

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Peter: China is committed to be carbon neutral by 2060. So there is a lot of demand for the industries to shift from coal burning to more solar power, wind mills and other forms of renewable energy. There is a push to provide funding to upgrade manufacturing facilities to make them green. So the demand is very high from the government’s standpoint. There are a lot of resources pouring into green industries. We see huge opportunities in green bank insurance and also many of the investment opportunities. We are excited to see these opportunities going forward.

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Corwin: Sustainably is increasingly a core focus for investors in Asia. Investors are increasingly not just concerned about the financial outcomes of their ESG investments but also they want to know that they're doing good right and so standards and the quality of standards are increasingly important. Now China is actually one of the largest issuers of green bonds. There are right now five different green bonds in china issued by or are defined by four different regulators and so there isn't really a standardized template of defining what green bond is in china which is a huge problem for investors seeking to invest into sustainable investments onshore in china and the central bank recognizes that and you see this huge push to align the product catalogue, meaning the definition of what it means to be green bonds onshore in china and this alignment to the global standards is progressing at a very rapid pace.

‍Corwin: As this progresses, we do expect increased interest from global investors to write the growth of ESG and green bonds in China. We do expect to see increased flows as we see greater alignment of global standards and the second when investing sustainably in China.

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‍Take a deeper look at the all new Endowus China Fixed Income Portfolio here.