The sleeping dragon - investing in china during war and peace

Wealth Management and Private Banking

17 March 2022

ChinaDiversificationEconomicGeopoliticsGlobalGlobal economyInflationInvestmentsMeeting of MindsMeeting of MindsWealth managementWealth Management and Private BankingWealth Management and Private Banking

Expert: Elliot Hentov PhD, Head of Policy Research, Global Macro, SSGA. Moderator: Blaise Cardozo, Director, Sionic


  1. War scenarios and China
  2. Russian de-dollarisation
  3. China - onshore vs offshore investing
  4. We are under-invested in China
  5. China delivers diversification, especially for bonds 


War scenarios:
Without the war, China was due for a market cyclical upswing this year.  If the war ends quickly, and China does not give overt support to Russia (especially on the battlefield), this is still possible, despite the inevitable commodity spikes and stagflationary impulse.

However, Russia needs to be able to show it has taken something before the war can stop.  Things could get much worse.  We could be facing the worst inflation, commodities super-cycle and recession ever.

Sanctions that could have been expected have been imposed much faster than expected.  It’s a strong signal to China: the Taiwan danger is zero for the reasonably foreseeable future.

Russian de-dollarisation:
In the 10 years up to 2015, Russia’s FX reserves were nearly all in USD, EUR and GBP, with a near 50/50 split between and USD and EUR/GBP.  That has changed significantly and become much more diversified with Yuan as the largest holding, and more gold than USD (which is now below 10% of the total).

With China as one of the few countries that is a net importer of energy and food, and Russia as a net exporter, the build-up of Yuan reserves is likely to continue.

China - onshore vs offshore investing:
Offshore is too heavily influenced by politics. This applies more to big companies, especially where there are national security, social peace or antitrust considerations which the state sees a need to control.  Intervention is most likely in high-growth sectors such as property, education and entertainment.

State support is most likely in sectors and companies that don’t pose a threat, such as agri-tech, renewables and bio-tech.

We are under-invested in China:
China represents one sixth of the global economy and its stock market is one eighth of the global total, yet allocation in Western portfolios averages around 2% - this probably needs to increase.

Also, China is under-valued, most noticeably in its Buffett Ratio (market cap to GBP).  China PE has been consistently lower than US PE and ACWI PE over the last 20 years.

FX risk with China is lower than other EM, largely as a result of Chinese policy to manage the exchange rate.

China delivers diversification:
40 years ago China followed EM.  In 2008 this switched round and China led EM.  In 2022 China is independent and has its own economic cycle, like the US.

The bond market in China is liquid and inflows grew to $8bn last year.  It is also the world’s second largest bond market, sitting below US and above Japan, and has an attractive risk-reward profile.

SSGA has launched a China SPDR ETF.

Key Takeaways:

  • Give serious consideration to investing more in China, in particular in the bond market and in carefully selected onshore stocks
  • While there is a strong case for investing in China, this could be destroyed by some of the outcomes to the war in Ukraine (along with most other investment opportunities)