With uncertainty hanging over the global markets, more investors will likely turn to China as a new safe haven for its relative stability during periods of global markets turmoil.
A rebound in the mainland stock market following the worldwide Black Monday bloodshed, which saw a circuit breaker halt US stock trading for the first time since 1997, is enough to demonstrate investor faith in the country’s market fundamentals. While the novel coronavirus is spreading fast in many European countries and likely in the US, China has basically achieved effective epidemic control and is now focusing much of its attention on the complete resumption of production and work.
With economic activities being gradually reverted to normalcy, China’s financial markets have generally outperformed the rest of world, thus winning increasing favor from global investors in recent days.
For starters, a steady exchange rate is crucial to foreign inflows into China’s capital market. As of Tuesday, the yuan’s central parity rate gained 1.22 percent against the US dollar from a low of 7.0246 recorded in late February, pulling back sharply from the psychologically important mark of 7.
Second, the relatively high yield on Chinese bonds will likely be highly attractive to foreign investors. Despite impact from the turbulent global economy, the yield on China’s 10-year sovereign bond has managed to remain stable at 2.5 percent so far. By comparison, the yield on the benchmark US 10-year Treasury tanked to an all-time low of 0.318 percent on Monday. In February, outstanding Chinese bonds held by foreign investors rose to a record 1.95 trillion yuan ($280.59 billion).
Moreover, bond yields in the US and other developed economies are expected to sink further amid widespread expectations of interest rate cuts and monetary easing due to the global spread of the new coronavirus. This means the bond yield difference between China and other economies could expand further, attracting more investors in the foreseeable future.
Third, China’s relatively stable stock market is becoming more attractive to foreign investment. As of Tuesday, the benchmark Shanghai Composite Index has gained 4.04 percent in March, following February’s 3.23 percent loss. By comparison, the Dow Jones Industrial Average plunged 10.07 percent last month.
Unlike US stocks that have ample room for further correction, the valuations of A shares are relatively low. And expectations of another round of massive economic stimulus in China have also contributed to general investor optimism toward the market.
Last year, a group of US bipartisan senators attempted to block a federal pension fund from investing in Chinese stocks. Despite the irrationality of some politicians who favor politicizing everything, it was a blessing for US retirees that their pension fund resisted the pressure and grasped investment opportunities in China.