BFF China
BLACKROCK FUTURE FORUM

China: The evolving investment landscape

China-focused experts examine the country’s increasing economic and geopolitical influence, while investment professionals discuss potential portfolio opportunities arising in the wake of China's dynamic growth.

New opportunities in an expanding economy

China’s emergence from the pandemic has been fast and strong, strengthening a growing opportunity to set in a dynamic market. With predictions putting China as the top driver of global growth, we believe it’s now too big a market to overlook. Until recently, it was difficult for foreigners to invest in China - so despite decades of growth, most global investors remain underexposed to China’s capital markets. But now with lowered barriers to entry, underexposed investors can participate more fully in Chinese markets. We asked investment professionals to discuss where they see opportunities and challenges in this evolving investment landscape.

China's ascending global presence: keynote sessions

This BlackRock Future Forum kicked off with Wei Li, Global Chief Investment Strategist at BlackRock Investment Institute, in conversation with Tom Donilon, Chairman of the BlackRock Investment Institute and former National Security Advisor to President Obama, and Dr. Ma Jun, President of the Institute of Finance and Sustainability and Co-Chair of the G20 Sustainable Finance Working Group. Tom focused on the geopolitical landscape, particularly with an eye on how the Biden administration’s approach will influence the bifurcation of global markets. Dr. MA Jun shared a local perspective of China’s economic outlook right from Beijing, including future drivers of growth like technology, sustainability and demographic shifts (Dr. Ma’s session was only available at the live event).

Quotation start

China and the United States are really going to be the two chief engines of growth in the world coming into 2021 and 2022.

Quotation end
Tom Donilon Chairman of the BlackRock Investment Institute

Zach Buchwald:  Welcome to the BlackRock Future Forum.  I'm Zach Buchwald and it’s my pleasure to serve as your host.  Today’s session will explore the opportunities and challenges of investing in China. 

China now contributes close to 20% of global GDP.  For investors that consider the entire global landscape of opportunities, China has simply become too big to overlook.  And for most of our institutional clients at BlackRock, the question is no longer do I allocate to China, but rather how do I allocate and into which segments?

Now until recently, it was difficult for foreigners to invest in China.  However, recent changes have opened up much of the Chinese markets and at the same time the investment opportunity set is growing, it’s maturing, and it’s becoming more diverse.  Investors have taken notice. 

Last year, China became the world’s top destination for new foreign direct investment, meaning more foreign capital flowed into China than into the US in 2020.  Now, some of that will reverse in 2021 as we emerge from the pandemic.  But still, China is predicted to be the biggest driver of global growth over the next five years.

The astonishing growth in the Chinese economy and its ascending global presence have created something of a competition with dual poles of growth between the US and China.  We’ve seen explicit flash points in the technology sector, as well as quieter competition in sectors like healthcare, automotive, agriculture.  And looming in the foreground are also commitments on both sides to a climate transition, which will drive investments into renewable energy and decarbonization efforts, among other sectors.  More competition, but also more growth and more investment opportunities.

Investors still tend to be under-allocated to China.  But between benchmark inclusion and globalization, China has made its way into most institutional portfolios, first through passive exposure and today more through active decisions.  This is most apparent in emerging markets portfolios where China’s benchmark weight has increased.  If emerging markets managers don’t get their China call right, their chance of producing alpha is now significantly impaired. 

To delve into all of this, we’re going to speak today with Tom Donilon, Chairman of the BlackRock Investment Institute and former National Security Advisor to President Obama, as well as a local view from Dr. Ma Jun, President of the Institute of Finance and Sustainability and former Chief Economist at the People’s Bank of China’s Research Bureau.  Tom will focus on the geopolitical landscape and Dr. Ma Jun will offer an on-the-ground perspective of China’s economic outlook.

As always, we will conclude the Future Forum with actionable investment ideas.  This time, you'll hear directly from BlackRock investors and experts, Gregor Carle, Jeff Shen, and Celia Yan, who will share their insights on Chinese fixed income, equities, and private market opportunities.  In addition, we are delighted to be joined by Preston Hutchings, Chief Investment Officer of Arch Capital Group. 

Now, without further ado, I’ll kick off our first segment by introducing Wei Li, Chief Strategist of BlackRock Investment Institute.  Thanks for joining us today.  And now, over to you, Wei.

Zach Buchwald:  Welcome to the BlackRock Future Forum.  I'm Zach Buchwald and it’s my pleasure to serve as your host.  Today’s session will explore the opportunities and challenges of investing in China. 

China now contributes close to 20% of global GDP.  For investors that consider the entire global landscape of opportunities, China has simply become too big to overlook.  And for most of our institutional clients at BlackRock, the question is no longer do I allocate to China, but rather how do I allocate and into which segments?

Now until recently, it was difficult for foreigners to invest in China.  However, recent changes have opened up much of the Chinese markets and at the same time the investment opportunity set is growing, it’s maturing, and it’s becoming more diverse.  Investors have taken notice. 

Last year, China became the world’s top destination for new foreign direct investment, meaning more foreign capital flowed into China than into the US in 2020.  Now, some of that will reverse in 2021 as we emerge from the pandemic.  But still, China is predicted to be the biggest driver of global growth over the next five years.

The astonishing growth in the Chinese economy and its ascending global presence have created something of a competition with dual poles of growth between the US and China.  We’ve seen explicit flash points in the technology sector, as well as quieter competition in sectors like healthcare, automotive, agriculture.  And looming in the foreground are also commitments on both sides to a climate transition, which will drive investments into renewable energy and decarbonization efforts, among other sectors.  More competition, but also more growth and more investment opportunities.

Investors still tend to be under-allocated to China.  But between benchmark inclusion and globalization, China has made its way into most institutional portfolios, first through passive exposure and today more through active decisions.  This is most apparent in emerging markets portfolios where China’s benchmark weight has increased.  If emerging markets managers don’t get their China call right, their chance of producing alpha is now significantly impaired. 

To delve into all of this, we’re going to speak today with Tom Donilon, Chairman of the BlackRock Investment Institute and former National Security Advisor to President Obama, as well as a local view from Dr. Ma Jun, President of the Institute of Finance and Sustainability and former Chief Economist at the People’s Bank of China’s Research Bureau.  Tom will focus on the geopolitical landscape and Dr. Ma Jun will offer an on-the-ground perspective of China’s economic outlook.

As always, we will conclude the Future Forum with actionable investment ideas.  This time, you'll hear directly from BlackRock investors and experts, Gregor Carle, Jeff Shen, and Celia Yan, who will share their insights on Chinese fixed income, equities, and private market opportunities.  In addition, we are delighted to be joined by Preston Hutchings, Chief Investment Officer of Arch Capital Group. 

Now, without further ado, I’ll kick off our first segment by introducing Wei Li, Chief Strategist of BlackRock Investment Institute.  Thanks for joining us today.  And now, over to you, Wei.

Highlights include:
01

What’s driving China's economic ascent

In the short term, growth may come from increased consumption, strong corporate profitability, and robust exports. Looking further out, pledges to carbon neutrality by 2060 will accelerate transitions into renewable energy and help establish a thriving market for green bonds and loans.

02

Renewed emphasis on self-sufficiency

The COVID-19 pandemic rewired global supply chains and encouraged many countries, including the U.S. and China, to actively pursue greater economic self-sufficiency. China has set out on a path of self-reliance with respect to technology, another predicted driver of growth for their economy.

03

How China became a top investment destination

During 2020 China became the top destination for foreign direct investments.1 This was spurred by lowered barriers to entry, higher yields and relatively high earnings growth - all of which will entice deliberate allocations to Chinese markets.

Exploring investor perspectives

BlackRock investment experts, along with the chief investment officer of a global insurer, discussed the role of China in portfolios with Zach Buchwald, BlackRock's Head of Institutional Business for the U.S. and Canada. BlackRock's Gregor Carle, Jeff Shen and Celia Yan highlighted trends in Chinese bond, equity and private markets, respectively. W. Preston Hutchings, CIO of Arch Capital Group, then shared his learnings of China’s investment landscape from over a decade of investing in the region. They all remarked on the evolution of Chinese markets and how investors can benefit from its projected growth.

Quotation start

China is offering the kind of improvements in yield that investors aren't able to find in other places.

Quotation end
Gregor Carle Head of Fixed Income and Credit Product Strategy for Asia Pacific, BlackRock

Zach Buchwald: The geopolitical environment vis à vie China is evolving real-time and the opportunity set for foreign investors in China is certainly impacted by what’s happening in the political foreground.  We saw this with the Trump Administration’s approach to trade policy and elected officials continue to weigh in on this topic as we have this very conversation.  At BlackRock, we recognize there are questions on many investors’ minds about environmental, social, and governance practices in China, as well as data and transparency on the investments themselves.  Addressing these issues will be critical for China to continue to attract global investors and BlackRock is committed to advocating for improvements in all of these regards.  Our investors bring years of experience in Chinese markets to focus on identifying high-performing, durable investments.  But at the same time, they’re also looking to raise the bar on governance, transparency, and other standards.

That brings us to our next segment, the Investment Hot Seat.  We’ve asked investors with on the ground expertise putting capital to work in China to discuss where they see opportunities and challenges in today’s markets.  And now, I'm pleased to introduce Gregor Carle, head of Fixed Income and Credit Product Strategy for Asia ex-Japan at BlackRock.  Gregor, welcome to the Future Forum.

Gregor Carle:  Thanks, Zach.

Zach Buchwald:  Good to see you.  Listen, we just heard from Dr. Ma Jun about the growth story out of China.  As an investor, how do you see the growth impacting the opportunity set across Chinese markets?  Is it enticing more global investors?

Gregor Carle:  Yeah.  You know, look.  I mean I think if we look back over what time – with China over the last ten years, you know, ten years ago you couldn’t really access the market and since then it’s now grown to be, you know, the second largest bond market in the world at $18 trillion.  So, a lot has changed, and I have to say that I don't think the participants in the market necessarily kept pace.  But we’re seeing that change rapidly now.  Investors now have access to a very large, now the second largest bond market in the world and one that is growing incredibly quickly.  It has incredibly strong diversification characteristics just by nature of those who are holding the market.  And then beyond that, you know, we’re seeing this inclusion into a number of the global bond indices, which means that, you know, investors who haven’t looked at China before are now having to look into China and the doors are open for that.

We’re living in a world where yield is in incredibly short supply and, you know, China is a source of that elusive necessity.  So, investors who are looking for yield are having to look further afield, and China is available now and offering the kind of improvements in yield that investors aren’t able to find in other places.

Zach Buchwald:  Okay.  Listen.  All of that resonates very strongly with me as someone who covers mostly US and Canada clients.  You know, in the West we’ve faced the persistent low-rate environment for so many years and investors are looking further afield, trying to find yield and diversification and that's a big part of why they’re looking to China.  Tell us how the Chinese bond markets are different.  Like what does the opportunity look like today versus what we see in the West?

Gregor Carle: Yeah.  I mean, look, China’s made these incredible strides, as I mentioned earlier, lifting some of the constraints of investing into the market over the ten – last ten years, removing some of the quotas so that investors have never been more easily able to access the market.  You know, if we look through some of the channels like CIB and direct channel, Bond Connect channel, there’s now ways that investors can access the market that they couldn’t do before. 

You know, if we think about index inclusion, you know, investors are focused on looking at, you know, in a very starting point how they can get access in the risk-free solution space, which is largely China government bonds and policy bank bonds.  And, you know, whether that be in the index space or investors are looking at it from an active perspective, it’s such a solid diversifier in portfolios and it’s one of the few, you know, quality governments that’s providing some yield.  And, you know, if we look at the policy from the Chinese policymakers, policy conditions remain reasonably tight and that means that China’s likely to remain attractive from that perspective relative to other markets. 

So, investors are dipping their toes in the rates market, that risk-free market, through government bonds, policy bank bonds.  And second beyond that is, you know, investors are looking at how it is they can generate alpha.  And if we look at that in the credit space, you know, this is an area where investors have to be more careful.  You know, if we look at ratings, local ratings of Chinese issuers, the vast majority of those issuers are rated AAA.  And this is where investors who can bring global context to the ratings process are going to be an important driver of value for investors, because the ability to be able to understand what the credit risk is in what is a relatively nascent market requires that global experience.

Zach Buchwald:  Gregor, last question.  What’s the opportunity for alpha in the Chinese bond markets?  Are there any particular bright spots that you’re looking closely at?

Gregor Carle: Yeah.  I mean, look.  Broadly I would say that there are investors who are considering allocating towards China as an out of index position, because they see these attractive yields are on offer there.  You know, whether it be in the CGBs and the policy bank space, indexes that are active, as I mentioned before, we see investors who are looking to take advantage of this incredibly low correlation that Chinese bonds offer within their portfolios.

If we look at the yield relative to risk measured by volatility, a very simplistic measure, China stands out.  It is a relatively attractive proposition for investors versus other markets. 

You know, specifically we do see some opportunities between the US dollar offshore Chinese issuers versus the RMB onshore issuers.  And a big part of that will just be how the government continues to progress its program of reforms and how we see investors starting to bring in risk-based pricing as some of those reforms play out and as proper fundamentals are analyzed within, I'm going to say, a global credit risk framework to bring good relative value analysis.

Zach Buchwald:  Okay.  Gregor, thanks for the insights and thanks again for joining us here at the Future Forum.

Gregor Carle:  My pleasure. Thanks, Zach.

Zach Buchwald: The geopolitical environment vis à vie China is evolving real-time and the opportunity set for foreign investors in China is certainly impacted by what’s happening in the political foreground.  We saw this with the Trump Administration’s approach to trade policy and elected officials continue to weigh in on this topic as we have this very conversation.  At BlackRock, we recognize there are questions on many investors’ minds about environmental, social, and governance practices in China, as well as data and transparency on the investments themselves.  Addressing these issues will be critical for China to continue to attract global investors and BlackRock is committed to advocating for improvements in all of these regards.  Our investors bring years of experience in Chinese markets to focus on identifying high-performing, durable investments.  But at the same time, they’re also looking to raise the bar on governance, transparency, and other standards.

That brings us to our next segment, the Investment Hot Seat.  We’ve asked investors with on the ground expertise putting capital to work in China to discuss where they see opportunities and challenges in today’s markets.  And now, I'm pleased to introduce Gregor Carle, head of Fixed Income and Credit Product Strategy for Asia ex-Japan at BlackRock.  Gregor, welcome to the Future Forum.

Gregor Carle:  Thanks, Zach.

Zach Buchwald:  Good to see you.  Listen, we just heard from Dr. Ma Jun about the growth story out of China.  As an investor, how do you see the growth impacting the opportunity set across Chinese markets?  Is it enticing more global investors?

Gregor Carle:  Yeah.  You know, look.  I mean I think if we look back over what time – with China over the last ten years, you know, ten years ago you couldn’t really access the market and since then it’s now grown to be, you know, the second largest bond market in the world at $18 trillion.  So, a lot has changed, and I have to say that I don't think the participants in the market necessarily kept pace.  But we’re seeing that change rapidly now.  Investors now have access to a very large, now the second largest bond market in the world and one that is growing incredibly quickly.  It has incredibly strong diversification characteristics just by nature of those who are holding the market.  And then beyond that, you know, we’re seeing this inclusion into a number of the global bond indices, which means that, you know, investors who haven’t looked at China before are now having to look into China and the doors are open for that.

We’re living in a world where yield is in incredibly short supply and, you know, China is a source of that elusive necessity.  So, investors who are looking for yield are having to look further afield, and China is available now and offering the kind of improvements in yield that investors aren’t able to find in other places.

Zach Buchwald:  Okay.  Listen.  All of that resonates very strongly with me as someone who covers mostly US and Canada clients.  You know, in the West we’ve faced the persistent low-rate environment for so many years and investors are looking further afield, trying to find yield and diversification and that's a big part of why they’re looking to China.  Tell us how the Chinese bond markets are different.  Like what does the opportunity look like today versus what we see in the West?

Gregor Carle: Yeah.  I mean, look, China’s made these incredible strides, as I mentioned earlier, lifting some of the constraints of investing into the market over the ten – last ten years, removing some of the quotas so that investors have never been more easily able to access the market.  You know, if we look through some of the channels like CIB and direct channel, Bond Connect channel, there’s now ways that investors can access the market that they couldn’t do before. 

You know, if we think about index inclusion, you know, investors are focused on looking at, you know, in a very starting point how they can get access in the risk-free solution space, which is largely China government bonds and policy bank bonds.  And, you know, whether that be in the index space or investors are looking at it from an active perspective, it’s such a solid diversifier in portfolios and it’s one of the few, you know, quality governments that’s providing some yield.  And, you know, if we look at the policy from the Chinese policymakers, policy conditions remain reasonably tight and that means that China’s likely to remain attractive from that perspective relative to other markets. 

So, investors are dipping their toes in the rates market, that risk-free market, through government bonds, policy bank bonds.  And second beyond that is, you know, investors are looking at how it is they can generate alpha.  And if we look at that in the credit space, you know, this is an area where investors have to be more careful.  You know, if we look at ratings, local ratings of Chinese issuers, the vast majority of those issuers are rated AAA.  And this is where investors who can bring global context to the ratings process are going to be an important driver of value for investors, because the ability to be able to understand what the credit risk is in what is a relatively nascent market requires that global experience.

Zach Buchwald:  Gregor, last question.  What’s the opportunity for alpha in the Chinese bond markets?  Are there any particular bright spots that you’re looking closely at?

Gregor Carle: Yeah.  I mean, look.  Broadly I would say that there are investors who are considering allocating towards China as an out of index position, because they see these attractive yields are on offer there.  You know, whether it be in the CGBs and the policy bank space, indexes that are active, as I mentioned before, we see investors who are looking to take advantage of this incredibly low correlation that Chinese bonds offer within their portfolios.

If we look at the yield relative to risk measured by volatility, a very simplistic measure, China stands out.  It is a relatively attractive proposition for investors versus other markets. 

You know, specifically we do see some opportunities between the US dollar offshore Chinese issuers versus the RMB onshore issuers.  And a big part of that will just be how the government continues to progress its program of reforms and how we see investors starting to bring in risk-based pricing as some of those reforms play out and as proper fundamentals are analyzed within, I'm going to say, a global credit risk framework to bring good relative value analysis.

Zach Buchwald:  Okay.  Gregor, thanks for the insights and thanks again for joining us here at the Future Forum.

Gregor Carle:  My pleasure. Thanks, Zach.

Highlights include:
01

Chinese bonds offer diversification and yield

China is now the second-largest bond market in the world2 and is expanding quickly. Changes to foreign investor limits and more investment channels is giving greater and easier access to Chinese bonds, while offering new avenues to achieve diversification and yield.

02

Tech and sustainability stand out for investors in equities

Chinese tech stocks have become a competitive alternative to others around the globe. The country’s commitment to carbon neutrality by 2060 presents particular investment opportunities at the intersection of technology and sustainability.

03

China's private markets, an overlooked opportunity

Traditionally dominated by domestic investors, Chinese private markets are now enticing more foreign capital, which is one of the many factors improving governance risk. Meanwhile, tightening monetary policy has created additional opportunities, especially across real estate, digital infrastructure, healthcare and education.

Zach Buchwald
Head of Institutional Business (U.S. & Canada), BlackRock
Read biography
Gregor Carle
Head of Fixed Income and Credit Product Strategy for Asia Pacific, BlackRock
Read biography
Tom Donilon
Chairman of the BlackRock Investment Institute
Read biography
W. Preston Hutchings
Chief Investment Officer, Arch Capital Group Ltd.
Read biography
Wei Li
Global Chief Investment Strategist, BlackRock Investment Institute
Read biography
Dr. MA Jun
President of Institute of Finance and Sustainability, Adjunct Professor at Peking University National School of Development, Co-Chair of G20 Sustainable Finance Working Group
Read biography
Jeff Shen
Co-CIO and Co-Head of Systematic Active Equity (SAE), BlackRock
Read biography
Celia Yan
Head of China and Co-portfolio manager of the Asia Pacific Private Credit, BlackRock
Read biography
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