The ballooning twin deficits in the US points to further upside for the RMB. Some European pension funds are increasingly looking to China in the search for yield. The EU-China Comprehensive Agreement on Investment includes a commitment to a greater market access for EU investors.
The FTSE plans to start including China in the World Government Bond Index from October later this year, subject to confirmation in March. China’s growing trade surplus increases the likelihood that the currency will be more market-determined.
For China to consolidate its place as a viable option for investors, it will need to show that 1) the market is adept at facilitating price discovery, and 2) there is a clear commitment towards ESG.
On the first point, a managed increase in defaults sends an important message that the market is better able to identify the losers, and by extension the more valuable companies.
On the second point, China currently fares poorly on most ESG measures. However, according to Ping An, the “opening up of China’s capital markets is also driving more international capital with ESG themes into China, promoting ESG and responsible investment philosophies to gain greater recognition in China.”
For ESG investing to become credible, China will need to continue to push hard on its renewable energy plans. The latest data on wind energy is quite remarkable. China added 71.67GW of wind power capacity in 2020, surpassing the 60.4GW of new wind capacity added globally in 2019.
