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The panda in the room

  • China’s rapid economic development and dominant role in global trade has spurred a rapidly evolving financial system with an increasingly diverse and accessible capital market. The gradual removal of capital controls has already attracted a growing share of foreign investment, especially in the form of portfolio flows in equity and debt securities. Long-term institutional investors, such as insurance companies, have also expanded their presence in China amid rising exposures in high-growth emerging market economies, albeit with limited direct exposure in local currency. In this context, three asset classes are most attractive for foreign investors: local currency sovereign debt, highly-rated corporates, and equities. These asset classes typically represent the lion’s share of insurers’ investment portfolios and also drive current exposures to China. 
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  • China’s economic outlook remains favorable on account of strong policy support. China has experienced little economic scarring and has swiftly restored pre-pandemic output this year. We expect the current slowdown to peter out during the second half of next year and growth to remain solid relative to the US and Eurozone (+7.9% and +5.2% expected in 2021 and 2022, respectively). A greater fiscal impulse at the regional level funded by the issuance of special bonds should help local governments boost public investment. In addition, financing costs should remain low due to high system-wide liquidity and window-guidance by the central bank. These policy actions, along with the temporary easing of certain regulations, are likely to steer the economy towards a soft landing. 
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  • The countries’ revised growth strategy represents a significant upside risk to the current outlook, but near-term risks are tilted to the downside. The increased regulatory oversight that has rattled markets over the past year should be viewed through the lens of an evolving long-term sustainable growth model. Rising geopolitical tensions and domestic challenges have recently weighed on investor sentiment amid uncertain virus dynamics and related policy measures. Continued government restrictions and the risk of a renewed trade conflict with the United States, along with the potential for this to spread to their trading partners could have adverse confidence effects. However, over the long run, Chinese authorities’ policies under President Xi Jinping's banner program of promoting “common prosperity,” suggest slower but more sustainable and better distributed growth. Among other things, targets include reducing financial risks (e.g., in the real estate sector), narrowing socio-economic gaps between rural and urban areas and income classes, and stepping efforts towards climate targets. 

Contact

Andreas Jobst
Allianz SE
Jordi Basco Carrera
Allianz SE
Pablo Espinosa Uriel
Allianz SE