The world is watching closely as China transitions from its historic economic foothold in manufacturing to consumption.
Enabling this transition is the liberalisation of China’s financial system.
With market reforms in China taking fast effect, investors need to effectively utilise tools and intelligence for a more sophisticated picture of the associated risks and opportunities.
We saw recently how China’s unexpected devaluation of the Yuan surprised global markets, indicative of the conundrum portfolio managers and corporate treasurers face when manoeuvering direct and indirect exposure to China’s offshore and, increasingly, onshore markets.
China’s central bank recently altered its central parity system, causing the RMB to drop by 1.9 per cent in a single day – the biggest devaluation in the Yuan since 1994.
This intervention staved off inflation bets on China and narrowed the gap between its onshore (CNY) and offshore (CNH) Yuan spots, but also had global consequences.
In Australia analysts pointed to high-yield stocks (that benefit from deflationary forces), and Australian companies with large China cost bases and/or offshore revenue bases as beneficiaries of a weaker Yuan, versus commodity producers who face greater competitive pressures.
As the RMB grows as a preferred currency for international trade, its valuation has direct consequences for Australian diversified portfolios, raising the need to gain greater insights of the consequences and fuller understanding of the opportunity set.
The intense focus on opportunities created by China’s outbound capital has potentially created a limited view of the opportunity set.
In Australia, for instance, the China ‘story’ has been synonymous with lower commodities prices and inflated real estate markets.
However investors need to adopt a two-way view of the trade opportunity with China, and position portfolios accordingly.
The Australia-China relationship has evolved
Almost 40 per cent of participants in a Bloomberg survey said their greatest interest in the RMB over the next 12 months is its attractiveness as a safe haven currency or alternative to the USD.
This is indicative of an underlying confidence in China that should auger well for Australia and its maturing trade relationship with the nation.
Distinct from the last cycle, defined by China buying Australian resources to power its infrastructure boom, the cycle we are now in is far more sophisticated and sensitive.
Now more than ever investors need the right technological and financial infrastructure to navigate the new China confidently.
These include market monitors, liquidity and execution platforms and fx tools for forecasting, analysis, structuring and valuation.
Capital markets/RMB
As a mark of how this relationship has evolved, Australia was allocated an RQFII (RMB Qualified Foreign Institutional Investor) quota of RMB 50 billion last November, allowing qualified foreign institutions to invest in the Chinese market and invest in domestic securities within the approved quota.
The first RQFII quota by an Australian investor was executed in June of this year.
At around the same time the Shanghai-Hong Kong Stock Connect has further opened up access to China’s stock markets, with opportunities to add financial products and extend the corridor to Shenzhen.
A new silk road?
Another significant development that will drive investment flows is China’s recently announced ‘One Belt, One Route’ policy.
This ambitious program aims to create a new ‘Silk Road’ to Europe and other key markets (including Australia) through investment in infrastructure and trade corridors.
It puts China at the heart of economic development in key growth regions such as the ASEAN South-East Asian region.
Australian companies will be able to participate through Australia joining the newly formed Asian Infrastructure Investment Bank as well as exporting expertise in engineering, project management to professional services.
In turn policymakers are already indicating that the funding requirements of this new Silk Road investment will be met by the development of broader and deeper bond markets in Hong Kong which Australian investors can participate in.
As conduits for trade and investment into China’s domestic capital markets, offshore centers such as Australia offer investment options and are growing in importance.
The challenge, is navigating portfolios through volatility while maintaining visibility of the risks and opportunities.
Taran Khera is the head of Bloomberg Asia Pacific sales.
