AllianceBernstein's director of Asia Pacific fixed income, Hayden Briscoe, said China’s recent reforms are focused on transitioning the existing export-driven economy to one based on greater domestic consumption.
While he expects China will have to sacrifice some economic GDP growth for these reforms to be effective, he believes the reforms will result in a significant shift in growth dynamics and the steady appreciation of the renminbi (RMB).
Mr Briscoe said the internationalisation of the RMB is already opening up China’s capital markets.
“The increase in the currency’s use to date has been remarkable,” he said. “Just over 20 per cent of China’s global trade is now settled in RMB and last year the currency overtook the euro to become the second most-used in the global letter of credit market.”
Mr Briscoe considers the RMB to be currently undervalued and expects it to appreciate within a range of one to three per cent.
China’s trade and capital account surpluses have also increased, which will also place upward pressure on the RMB, he said.
Mr Briscoe believes the implications of Chinese government bonds entering global indices will be significant for global bond investors wedded to the benchmark as they will need to “relocate 12 per cent of the portfolios simply to maintain a neutral exposure”.
