China Becomes Attractive Investment Hub for FDIs, Pension Funds Amid Pandemic

With much of the world continuing to slowly recover from the economic implications stemming from the coronavirus pandemic, it appears that the Chinese economy is doing a lot better than most of its peers.

According to China’s Ministry of Commerce, the world’s second largest economy benefited strongly from foreign direct investment (FDI) amid the pandemic, which reached a record $144.37 billion in 2020. The latest data shows that FDIs into the country rose by 4.5% on a year-over-year basis, which, when expressed in yuan, amounts to a 6.2% increase. Foreign inflows into China’s service industry rose by 13.9% year-over-year, reaching $112 billion and amounting to 80% of the total FDI portfolio. In the meantime, FDIs in the country’s advanced-technology industry advanced by 11.4% year-over-year, while high-tech service sector investments grew by 28.5%.

Foreign investments from the main 15 FDI regions and countries increased by 6.4%, and accounted for 98% of the total FDI to China. Financial inflows from the UK and the Netherlands grew by 30.7% and 47.6%, respectively. Concurrently, investments from the Association of Southeast Asian Nations only rose by 0.7%. The Chinese ministry noted that the latest figures suggest the country has made a strong comeback from Covid-19, as well as met its target of stabilizing foreign investment in 2020.

Since the beginning of the pandemic, China’s seemingly quick economic recovery has caught the attention of investors overseas, many of which are starting to increase their allocations to the communist country. According to a recent report by Reuters, China’s bond market has also become alluring to European pension funds, as benefits are beginning to outweigh the political risks.

China’s debt market is the second-largest in the world, following the US, and despite foreigners owning nearly one-third of the US Treasury market, they only hold approximately 9.7% of Chinese sovereign debt. Although Western pension funds account for only a minuscule portion of foreign investments in China’s bond markets, their presence has been expanding. Globally, there are a total of $9.5 trillion worth of assets currently being managed by public and corporate pension funds, with 0.26% of them being held in Chinese bonds as of the third quarter 2020. That amounts to an increase of 0.04% compared to 2015.

Prior to the past decade, China was not very keen on opening its bond markets, and as a result, foreign investment has remained relatively low as of late. Although the slight increase in investment interest is anticipated, pension funds— which are well known to be significantly risk-averse— have now begun to go with the flow.

Although pension funds tend to be very secretive about their investment allocations, several money managers revealed some of the reasons behind the emerging phenomenon to Reuters. According to Insight Investments fixed-income investment specialist Sabrina Jacobs, China meets a lot of the criteria set out by pension investors for investing overseas— aside from size and credit ratings, the yuan tends to be less volatile compared to similar emerging currencies. In fact, the yuan has lower volatility than several G10 currencies, including the Australian dollar.

In addition, Chinese markets tend to move opposite of its government bond peers. “While you have a very high correlation between, say (German) Bunds and Treasuries, Chinese government bonds are only 15 to 20% correlated to other bond markets, the big ones globally. So, it is an attractive diversifier as well,” notes Jacobs.

Information for this briefing was found via the China Ministry of Commerce and Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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