3 takeaways from China’s V

China’s economic resilience, its important contribution to global growth and the RMB’s increasing attractiveness make the case for Chinese assets in investment portfolios. China’s 14th Five-Year-Plan will reveal what the government’s upcoming key priorities are and where the potential opportunities for investors lie.

China’s economy grew 4.9% in 3Q20 from 3.2% in the previous quarter. While growth came in below consensus, the mainland is probably the only large economy to have delivered the elusive “V” in its economic recovery. See Fig. 1.

Fig. 1. China real and nominal GDP growth (%yoy)


Industrial output, fixed asset investment and exports maintained their positive trends since bottoming out in the first quarter of the year. Notably, export orders in September recorded its strongest increase (50.8) since January 2011. That said, the broadening out of the recovery to domestic consumption was perhaps the most encouraging read. Retail sales expanded by 3.3% yoy in September, up from 0.5% yoy in August, after contracting for 5 consecutive months. Healthy retail sales registered during the recent Golden Week (October 1-8) suggest that domestic spending may continue to recover, if consumer confidence grows. During the Golden Week, daily average sales rose 4.9% yoy versus the recent highest reading of 0.5% yoy in August. A recovery in China’s service sector will be key to broaden its economic recovery to date. Nevertheless, China appears on track to deliver around 2-3% GDP growth in 2020.

We believe that there are three takeaways for investors:

1. China’s economic resilience

China’s ability to deliver positive growth in 2020 despite internal and external challenges, reflects the resilience and potential of China’s economy. This is unlikely to be a one-off feat. According to estimates from the IMF, China is expected to be the largest contributor to global growth in 2025. See Fig. 2. This underscores the need for investors to have exposure to Chinese assets in their portfolios.

Fig. 2. Fifteen biggest contributors to global GDP growth in 2025


2. The RMB’s increasing attractiveness

The RMB is up more than 7% against the USD since May1. According to Goh Rong Ren, Portfolio Manager, Fixed Income, Eastspring Singapore, while the RMB may become more volatile heading into the US Presidential election, China’s superior response to the pandemic, its economic rebound to date, the attractive yields of its onshore bonds and its favourable balance of payments pits the RMB favourably against the greenback over the medium term. Given global central banks’ vast holdings of the US dollar and the RMB’s improving profile, some diversification of global foreign exchange reserves cannot be ruled out. William Xin, Head of Fixed Income, Eastspring China, believes that with the Chinese government bonds’ attractive yields, China bonds will be one of the key beneficiaries of any reserve diversification. Fig. 3.

Fig. 3. Nominal and real yield comparison of government bonds


3. Opportunities in China’s digital eco-system

On the back of the Chinese economy’s rapid rebound, the Chinese A-share market is up 21% year to date in USD terms, outperforming the MSCI Asia ex Japan Index as well as the S&P 500. On a 12-month forward price to earnings ratio, the China A-share market is more attractively priced than its regional and global peers, although it is trading above its own historical average. Fig. 4. With further policy fine-tuning appearing limited, a stronger than expected recovery in the economy and corporate earnings would be key to drive the market higher.

Fig. 4. 12-month forward price to earnings ratio – China A still cheaper than most


Following the China A-share market’s rally, investors need to be more discerning on the themes and sectors they invest in going forward. China’s 14th Five-Year-Plan will reveal what the government’s upcoming key priorities are. The digital economy has been imperative in supporting the people’s well-being during the COVID-19 outbreak. Michelle Qi, CIO Equities, Eastspring China expects the government to put in place more policies to foster the digital economy. On-line platforms have changed consumer behaviour, creating investment opportunities across the entertainment, health, education, insurance and e-commerce sectors. Investors however will need to look beyond the obvious beneficiaries in these sectors in order to find alpha generating opportunities within their respective eco-systems. As such, combining macro themes with in-depth bottom-up analysis would be key to capturing the best investment opportunities.

For Use with Professional Clients / Qualified Investors Only. Not Approved for Further Distribution or Use with the General Public.

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.

Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.

Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.

The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.

Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.

Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.

Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.