The outlook for the Chinese economy is expected to remain challenging in 2020, with further downside risks to growth. That said, our China Fixed Income team expects policymakers should continue to implement proactive fiscal policies while maintaining prudent monetary easing to provide support. In this 2020 outlook, the team also outlines the opportunities they see in the China fixed income market.
In 2019, the Chinese economy faced several headwinds. In particular, the US-China trade war has had a negative impact on Chinese bond and currency markets. After reaching a temporary trade truce in December 2018, risk sentiment was positive in the first quarter of 2019. By May, however, there was a sharp deterioration in US-China relations when the Trump administration proposed hiking tariffs on US$200 billion of Chinese imports to 25% and launched sanctions on a leading Chinese telecommunications equipment maker.
Following the tentative truce reached at the Osaka G-20 meeting, trade tensions were reignited in August after the US threatened to impose tariffs on the remaining US$300 billion of Chinese goods. The renminbi (RMB) consequently depreciated by 2.85% against the US dollar during the month, with the People’s Bank of China allowing the RMB to move above the psychologically important 7.0 level for the first time since 20081. As the RMB approached the 7.2 level in early September 20192, we saw an easing in trade tensions as both sides agreed to work towards a Phase-One trade deal. Additional tariffs scheduled for October were also suspended.
We have seen gradual declines in China’s GDP growth in 2019, with year-on-year GDP for Q3 falling to 6.0%. It had been 6.4% in Q1 and 6.2% in Q2. Meanwhile, GDP for 2019 as a whole is forecast to be around 6.1%3. PMI indicators have remained below 50 for much of 2019, showing a contraction in economic activity before recovering slightly from August onwards. Despite weak macroeconomic conditions, the government has been careful to avoid over stimulus, and any monetary easing has been directed towards weaker small and medium-sized enterprises. The government has also adopted a more prudent approach to monetary easing and appears willing to absorb slower GDP growth in exchange for greater financial stability. At the same time, October’s headline CPI inflation number accelerated to 3.8% (year on year), an increase that was primarily driven by pork prices breaching the official 3% ceiling for the first time since November 20134. This development has naturally set a limit on how far monetary policy can be eased.
The outlook for the Chinese economy is expected to remain challenging in 2020, with further downside risks to growth. That said, we expect policymakers should continue to implement proactive fiscal policies while maintaining prudent monetary easing to provide support.
On the fiscal front, the government could front-load the supply of special bonds in early 2020, allowing local governments to spur infrastructure investment growth. Monetary easing may be modest with further cuts to the reserve requirement ratio. There may also be measured reductions in the medium-term lending facility, the reverse repo rate and the loan prime rate that would all be implemented in a data-dependent fashion.
On the currency front, the path for the RMB may be somewhat binary in 2020, with room for further appreciation from current levels now that the Phase-One agreement appears to have been successfully concluded. On the other hand, the RMB could weaken if there is further disagreement on trade down the road. We believe that RMB will remain at or around current levels (perhaps slightly weaker) in 2020, as difficult US-China trade relations may persist, even if a Phase-One deal is successfully signed. Overall, we expect that returns for China bonds in 2020 will be well supported by their attractive yields relative to other similarly rated global bonds. They will also benefit from the softer economic conditions that will keep official rates low. This scenario should provide investors with the potential for capital gains.
Global investors will become increasingly attracted to the Chinese bond market over time, given its diversification benefits and the opening of channels such as Bond Connect that has helped improve access to the onshore Chinese market for foreign investors. This trend is also being promoted by the inclusion of Chinese bonds in global market indices. In September 2019, JP Morgan announced that it would include Chinese government bonds in its GBI-EM Global Diversified Index from February 2020. Such a move will lead to an approximate weighting of 10% in the index over 10 months5 and estimated flows of around US$24 billion. Meanwhile, the widely followed FTSE Russell World Government Bond Index has postponed its inclusion of Chinese government bonds for now, but we believe this could still happen in 2020.
We believe that 2020 will present both opportunities and challenges while domestic growth continues to face downward pressure. Nevertheless, Chinese government bonds and high-quality corporate issues should be well-supported, even in such an environment, as they offer attractive and diversified risk-adjusted returns for global investors.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeam.com.
Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland. Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U). Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G). Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.