QUESTION OF THE WEEK

Which Chinese asset do you favor?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and insights.

    China's National People's Congress recently ended with a balanced message of achieving growth while raising the quality of that growth over time. What do you see as the biggest opportunity in Chinese assets in 2021?

        Woman dancing in rice fields

        Equities listed overseas (40%) was voted as the biggest Chinese asset opportunity in 2021 in response to our public poll. Next favorite: Domestic A-shares (30%); government bonds (20%), and then credit (10%). 

        On the other hand, BlackRock portfolio managers favored onshore equity (38%) as the most attractive opportunity, followed by government bond markets (26%).

        Source: Blackrock Investment Institute, with data from SurveyMonkey. Note: Data does not include results from BlackRock social media polls.

        The allure of Chinese assets

        Some investors signaled high convictions on Chinese government bonds (CGBs). Why? China is at the point where financial and fiscal conditions are putting enough upward pressure on rates to make duration attractive again, creating diversification potential for investors. BlackRock’s Factor-Based Strategies Group views Chinese government bonds as attractive as they have potential to behave more like traditional developed market sovereign bonds in adding defensiveness to a portfolio, yet offer much higher yields. Some viewed the Fed's higher tolerance for inflation widening the difference between real rates in the U.S. and Asia, supporting the case for Asia bond outperformance in the medium term. 

        An emerging markets portfolio manager says onshore equity markets offer investors access to parts of the Chinese economy not captured by offshore listings.

        Others viewed the pullback in Chinese tech giants on the back of rising regulatory pressures as a potential attractive entry point for investors with longer horizons than a few months. Outbound Chinese travel – a significant source of business for several global tourism destinations – is still well below pre-pandemic levels with one notable exception: Macau.

        Our views on Chinese assets

        The Chinese government has set a conservative GDP growth target of “above 6%” for 2021, reflecting two main uncertainties – the pandemic and U.S.-China tensions, in our view. The Biden administration is engaging in strategic competition with China, particularly on technology, and has criticized Beijing on human rights issues. 

        The more confident Chinese policymakers appear on the macro outlook, the more risks could emerge on the micro level. A higher tolerance for market forces could shutter more “zombie firms” in credit markets; dominant companies in certain industries face risks due to an anti-monopoly campaign. 

        Even with these risks BII sees China exposures as core strategic holdings that are distinct from EM exposures. BII favors above-benchmark allocations to Chinese assets in strategic portfolios – for returns, as well as diversification potential given their low correlations with global assets. The dynamic between Chinese government bonds and their global peers tell a similar story. We also see China under-represented in global indices relative to its economic and technological heft. The recent sell-off in Chinese equities may also present an attractive entry point. 

        For a deeper dive into BII's views on China learn more in the Global weekly commentary.

         

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