Chief Economist & CIO
Summary: China has always been a major power, but its relative ascent versus the US and Europe is steepening, and Beijing's efforts to open its markets to global investors will only further this trend.
This is now changing fast with Stock Connect, Bond Connect and multiple other ways of opening the Chinese economy to inflow and foreign participation in its capital markets.
There are many ways to measure a country’s success and rise – the most common are economic numbers like GDP per capita, overall GDP or productivity, and by those measures China is a stunning success and one that has created great admiration and enormous global trade flows.
In other words, it’s more important to monitor the net changes to Chinese credit and fiscal policies than it is to follow the US’ lead (which most of us grew up with and were trained to follow).
There is, however, another key bellwether for a country’s success, impact and sophistication, and that’s the size of its capital markets and access to same. In “Capital Markets – An engine for economic growth”, Geert Bekaert of Stanford University and Campell R. Harvey of Duke University write:
“Economic growth in a modern economy hinges on efficient financial sector which pools domestic savings and mobilizes foreign capital for productive investments. Without an effective set of financial institutions, productive project may remain unexploited”.
The globalisation of markets since the Berlin Wall’s fall in 1989 and China’s inclusion in the World Trade Organization in 2001 have made this argument more valid and true.
China’s role in the asset allocation world is improving fast through a number of channels, with Bond Connect being one of the newest ones. Global asset allocation to Chinese markets is less than 10% of the total, with the US at more than 50%. Bridgewater’s report, entitled “The shift to Chinese assets is beginning”, expects China’s share of global assets to increase to 30% over the next decade while the US’ share should drop to 40%.
This is all based on China continuing to improve domestic infrastructure for bonds, but also allowing bigger and broader access to Chinese markets. The number of changes over the last few years is inarguably impressive:
This offers major diversification from a cycle perspective even without considering the increasing relative size of the Asian market. There are 7 billion people on the earth today, and 4.5bn of them live in Asia.
We all know the story of “if I could only sell a bicycle to everyone in in China…”
China is a global power in every aspect save that of a global reservoir for investors (with capital markets commensurate with its size). There is a need for China to become a deposit base and an alternative to Europe and the US as its global role increases. It must be noted as well that any aspiration to attain reserve currency status needs to come with more open capital accounts and increased access to financial markets.
China is clearly determined, and is acting on this. Bond Connect opens up a market that is deep, diverse and attractive. China’s bond market represents only 73% of its GDP, where Japan sits at 336% and the UK at 207%.
We are confident that China will build on its recent history and continue to reform and open up. We believe it’s paramount for our clients and friends to realise how small global Chinese allocation actually is, and how big it can and will become. This is a long-term trend that we believe to be irreversible, and as such we look forward to facilitating China’s bond connect with our partners.
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