Investing in China to Generate Returns and Tackle Climate Change

We are at a pivotal moment for investing in China, particularly in the fixed income market. Many investors remain under-invested in China with foreigners owning just 3 - 4% of onshore bonds and equities respectively 3 , although this is likely to grow meaningfully over the next few years. As China stocks increasingly become part of international indices, and the process and benefits of investing in China become easier to understand, we expect to see an increase in demand from our clients. China bonds, in particular, have experienced a surge in demand. The China bond market is already the second largest in the world, with a value of $18 trillion 4 , but this is forecast to nearly double by 2030 as Chinese debt capital markets open up 5 and integrate into the global capital markets – potentially one of the biggest structural shifts in the investment market this decade. Global investors recognize that the post-pandemic world will have much higher levels of debt, but with lower yields in the foreseeable future, and need to find opportunities for income generation. China’s fixed income market creates the diversification and income benefits that investors are seeking, whether through standalone asset allocation to China, purposeful allocation to increase portfolio diversification and resilience, or taking an active approach by using data to identify unique opportunities for alpha generation. Why now is the time to invest in China (or “China Allocations in Context”?) 3 3 People’s Bank of China, as of 31 March 2021, includes publicly listed Chinese equity securities denominated in renminbi, incorporated in China and onshore bond issuance, including both government and corporate debt. 4 Wind, end June 2021 5 Aberdeen Standard Investments At a time when China is opening up, its international relationships are under new pressure, not least with the United States. The US is taking firmer stance on Chinese companies, particularly around technology, while the recently announced deal between the US, UK and Australia has far-reaching implications across information sharing technology, artificial intelligence and cybersecurity. At the same time, China is taking a more top-level approach to development management in a drive to manage both the economy and society. The government is seeking to position China as a global technology leader and accelerate market growth and foreign capital inflows. China is accepting applications from wholly-owned foreign financial companies and jointly-owned wealth management companies, allowing domestic institutions greater access to international markets, and vice versa. Despite the structural and persistent tensions within the US-China relationship, policy makers remain confident in the international appeal of the Chinese market and its economic momentum. However, with parallel paths between China and the US, the question is whether stress on one will impact the other, and what it means for companies trying to navigate both worlds. China pursues policy opening despite changing international dynamics 2