China’s bond market in particular has been a massive draw for investors during the pandemic © FT montage; Shutterstock

Despite a global coronavirus pandemic that began in China, 2020 has transformed into the year it all came together for the country’s capital markets, as foreign investors snapped up more than Rmb1tn worth of stocks and bonds.

China’s benchmark CSI 300 index is up about 27 per cent this year, in dollar terms, beating the S&P 500 by more than 13 percentage points. Shenzhen’s tech-focused ChiNext has risen some 59 per cent, on the same basis, exceeding even the runaway US tech benchmark, the Nasdaq Composite. Chinese government bonds have also drawn new fans with their rare source of yield.

The $150bn-worth of inflows, which came through Hong Kong programmes that connect investors to the mainland, mark a contrast with January, when Chinese stocks were the first in the world to feel the heat from the pandemic. Investors say the surge is likely to keep coming.

“I’ve been in Asia for 20 years and for most of that time period it’s been pretty challenging to get investors to look at the onshore market,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Standard Investments.

This year dealt a harsh lesson to those who hesitated to match global benchmarks’ increased weightings for Chinese securities, he said. “For any emerging markets investor that’s been underweight [on China] it’s been quite a painful trade.”

China’s bond market in particular has been a massive draw for investors during the pandemic thanks to reforms to open up the country’s financial system and Beijing’s initially sluggish but ultimately decisive response to the Covid-19 outbreak.

Harsh lockdowns across the country proved sufficient to get the economy back up and running near full capacity in the second half of 2020 — even as the rest of the world struggled to bring the virus’s spread under control.

“China is much further along its post-Covid recovery path,” said Paul Colwell, head of Asia advisory portfolio group at Willis Towers Watson. “The way policymakers act in response to changes in the economy, monetary policy, fiscal policy . . . China operates at a fundamentally different frequency to the rest of the world,” he added.

With China’s growth returning to pre-Covid levels and domestic consumption picking up, the central bank has been able to leave its benchmark interest rates almost untouched while others cut theirs hard or launched bond-buying programmes that crammed yields close to zero.

That meant China was the only game in town for debt investors seeking returns. Foreign holdings of Chinese government debt through the market link in Hong Kong grew by more than Rmb900bn in the first 11 months of 2020.

Sameer Goel, a macro strategist at Deutsche Bank, said foreign bond-buying this year was “even larger than what one would’ve expected” from passive flows after global benchmarks began including Chinese government debt in 2019.

Mr Goel said foreign buying of onshore bonds, which will get another boost next year from incorporation into FTSE Russell’s influential World Government Bond index, had helped drive a record six-month rally for the renminbi.

Line chart of Yield on 10-year sovereign bonds (%) showing China's central bank keeps its powder dry during the pandemic

“Pent-up demand among global investors who wish to diversify away from the US dollar” is helping to support the Chinese currency, said Julia Ho, head of Asian macro at Schroders.

That growing confidence in the renminbi, which had taken a series of sharp falls in recent years as the US-China trade war intensified, has also helped ease investor apprehension over Chinese equities, which are among 2020’s best performers.

Equity inflows, although much smaller than those in the bond market, are now positive after outflows earlier this year. Since Donald Trump lost November’s US presidential election, setting up almost certainly calmer US-China relations, buying appetite has strengthened, with net foreign purchases of Chinese equities through a stock connect programme in Hong Kong swinging back up to about Rmb170bn ($26bn) this year.

Joe Biden’s victory helped push the benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks up 6 per cent in November.

Even in spite of rising tensions, flows into China have run at a rapid pace throughout the Trump presidency, with total inflows of over $620bn over his four years in office. Similarly, the number of Chinese IPOs in the US grew faster under Trump than it had under Barack Obama. But the country faces growing bipartisan hostility in Washington, and Mr Biden has said he will not immediately lift Mr Trump’s trade tariffs.

Line chart of Net purchases of Chinese equities via stock connect programme YTD ($bn) showing Biden win spurs return to Chinese stocks

“The stance will remain adverse”, said Thomas Gatley, an analyst at Gavekal Dragonomics in Beijing.

A global vaccine rollout could also undermine China’s competitive edge as one of the few major functioning global export economies, Mr Gatley added.

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Recent bond defaults by cash-strapped state-owned enterprises, once thought to be fully guaranteed by Beijing, have also alarmed some local investors, who fear policymakers’ desire for fiscal discipline is returning. This could lead to more caution from investors, said Michelle Lam, senior China economist at Société Générale, “and this tightening of credit conditions will be negative for growth”.

But Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management, suggests that China is positioned for both positive and negative scenarios for the coronavirus, and that global flows into the country are “just going to accelerate”.

“The number of conversations we’re having with clients is just ever-increasing,” he said. “People are making their first standalone allocations in China.”

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