China strategies
China Fixed Income
China Fixed Income
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Income strategies
Investor focus
Accessing China
Accessing China
Investing in China's new era
Index inclusion
Important legal information
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High yield, direct access
Bringing China into focus
Stepping into the future
Fundamentals
Where to invest?
Stepping into the future
Silver population, golden opportunity
Where to invest?
For professional clients / qualified / institutional investors only. Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management. Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. © UBS 2018. The key symbol and UBS are among the registered and unregistered trademarks of UBS.
For professional clients / qualified / institutional investors only
Greying population, golden opportunity
Bringing China into focus
High yield, direct access
CNY is likely to continue to strengthen
Industrial upgrading
2005
Sub-optimally constructed indices Representative benchmarks are backward-looking and don't capture dynamic companies in emerging 'new economy' sectors.
USD
Mar-15
(2026-2030)
2.0
The long and short of it
CNY exchange rate versus USD and EUR
11
Since the 19th Party Congress in November, the Chinese government has been talking about stepping into the future with a series of policies to create a 'new era' for China.
Innovation-led development
950,000
Where to Invest
Environmentally-friendly growth
748,000
2016
Innovation-led development
China wants to diversify financing channels to the economy and is steadily opening its markets to foreign capital.
(2025 f)
With China's growing importance to global trade and the momentum of its structural reforms, we expect the supportive environment for the CNY to continue.
Equities
2020 (f)
Mar-15
Mar-17
High retail participation Retail investors dominate onshore equity markets, which can lead to mispricing in the market and opportunities for active, professional investors.
What does that mean for investors?
May-15
453,000
USD 30.7tn
China offers opportunities for active managers.
Nov-14
Nov-15
51.6%
Silver population, golden opportunity
Nov-16
Source: International Federation of Robotics, 2017, UBS Asset Management 2018
Mar-14
China fixed income – high yield, direct access
0.0
Dive deeper
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Protectionist policies may weigh on China's export sector and impact growth. However, we're focused on domestic growth and see strong prospects for consumer-driven sectors.
USD 8 trillion
Index inclusion – Bringing China into focus
5%
Jul-14
326,000
Stepping into the future
For professional clients / qualified / institutional investors only
Nov-17
285,000
Increasing urbanization
10%
287,000
(2015)
Industrial upgrading
United States
9
Private - old economy
Two main risks on the horizon
12%
Forecasts of the services sector's contribution to China's GDP
25%
47.6%
20%
China
US
Creating an automated future
Where to invest
The Chinese government is rebalancing the economy away from manufacturing towards a services-led growth model. Reforms are boosting consumer demand and supporting new economy industries, like consumer, healthcare, financials, and IT. China's services sector still has ample room for growth since its share of GDP (c. 51.6% in 2016) is well below developed countries like the US (c. 87%).
China
China has set itself specific goals for its 13th Five Year Plan
Increasing urbanization
451,000
Jul-17
China is expected to overtake the US as the world’s largest economy by 2025.
Overseas investors' onshore China holdings (RMB trillions)
Jul-16
7
Building the world’s largest economy
56.1%
2018 (f)
Debt
Financial Sector Reforms
1.0
2015
Source: Bloomberg April 2018
Services and consumer-led growth
USD 11.1tn
(2025 f)
A strong case for active investment
Sep-14
(2016-2020)
Sep-15
316,000
Nominal GDP
Earnings growth CAGR 2011 – 16 :SOE vs Private companies
Jan-17
(2015)
May-15
China fixed income – high yield, direct access
China's economy is transforming rapidly, which creates investment opportunities. Our PMs are positive on the prospects for equity and fixed income markets. We hold high conviction views on 'new economy' sectors, like healthcare, technology, and consumer. A major near term catalyst is the inclusion of Chinese stocks and bonds in global indices.
US-China trade tensions
0.5
(2021-2025)
Sep-16
Source: World Bank 2013, UBS Asset Management 2018
Delivering the government’s plan
Silver population, golden opportunity
Jan-14
Jan-15
Source: China National Development and Reform Commission, 2016
China's strong structural growth story, reform momentum and attractive valuations make for a compelling investment case.
Source: Bloomberg, June 2018
1m2
2.5
61.1%
2018
Financial sector reforms
6
Jan-15
EUR
Under-researched market Onshore equities are relatively under-researched, creating opportunities for active managers who take a granular approach to researching companies.
Opening financial markets
New performance targets for local officials that stress supply-side reforms, tax cuts, regulatory roll-backs, closer control on infrastructure and fixed asset investments.
USD 28.6tn
The strengthening US dollar has been putting pressure on some emerging market currencies recently, we believe this should prove temporary for the CNY. Due to fairly tight controls over China's capital account, the CNY's exchange rate is susceptible to political influence in the short term. However, the CNY no longer appears undervalued and is probably in the fair value range.
2019 (f)
Bonds
Home
397,000
Phasing out old industrial capacity, tightening credit to low-value-added industries, supporting new strategic industries.
(2011-2015)
Source: FactSet, UBS Asset Management, Dec 2017 Note: This information should not be considered as a recommendation to purchase or sell any security
326,000
Initiatives like the Shanghai and Shenzhen Stock Connects, plus Bond Connect, have driven a 3-fold increase in overseas investment into China's financial markets. We believe inclusion of China's equity and bond markets in global benchmarks will further drive overseas investment into onshore markets.
May-16
Home
Made in China 2025, expanding internet services, improving internet infrastructure, increasing R&D expenditure, supporting hi-tech education.
Services and consumer-led growth
May-17
300,000
Imposing tough environmental laws and regulations, protecting land resources, and reducing energy and water consumption.
8
Stepping into the future
2010
Building urban infrastructure, reducing barriers to urban residency, promoting rental housing, and increasing housing supply - particularly in lower-tier cities.
1.5
2017
China's high debt levels are a concern. We think the situation is manageable. Hear what Geoffrey Wong, Head of Global Emerging Markets Equities, has to say.
301,000
585,000
Sep-17
Environmentally friendly growth
15%
USD 18.2tn
340,000
UBS Asset Management
Index inclusion – Bringing China into focus
Stepping into the future
Source IHS Markit, 2016, UBS Asset Management, 2018
Private - new economy
May-14
285,000
Opening the financial sector to foreign investment, reducing barriers to direct equity and fixed income investment.
Japan
China
China is ramping up robotics installations and automating its manufacturing sector. As automation grows, old-economy sectors are being phased out as new industries and processes are emerging and raising productivity.
0%
Building a services-led economy
US
21%
Total installed robots by country, 2016-2020(f)
SOE
10
2%
China
393
Dive deeper
2017
Source: PBC, Wind, UBS-S, Data as of Dec 2017
2007
17.3%
Correlation with the MSCI World
Fixed income is also being included
600
DEC
To promote competition and raise standards, China announced it would remove limits placed on foreign financial firms' investments in China
Share of global GDP (2016e)
Onshore credit rating market opens to foreign firms
Index inclusion – Bringing China into focus
2011
29.3%
*Based on free float market-cap of A-share stocks to be included, and a 30% upper limit of foreign ownership. Source: MSCI, UBS, May 2018
billion inflows
DEC
2009
Source: Bloomberg (various reports)
MAR
2016
2017
2013
Silver population, golden opportunity
USD7.7tn
JUN
Investors can allocate as much as they wantto A-share stocks included in Shanghai-Hong Kong Stock Connect program
A-shares
2018: 5% of 234 A-shares
2017
For professional clients / qualified / institutional investors only
Stock Connect
Home
0%
JUN
QFII quota
China opens its bond markets to international investors via a trading platform in Hong Kong, investors can now freely trade onshore securities
1.5%
IMF includes RMB, in its accepted basket of international currencies
63%
NOV
4.4%
JUL
USD
3.5%
$18.5
Number of companies
Home
50
Foreign investors' A-share holdings have quadrupled since Dec 2013, and have accelerated through H2 2017.
China fixed income – high yield, direct access
37.9%
Economic significance versus global investors’ exposures
Index inclusion – Bringing China into focus
Such an "All China" investment approach offers: - a larger investment universe - a different opportunity set - low correlations to global markets
3.7%
2.1%
Why are Chinese bonds being included in Bloomberg’s global index? And why should investors pay attention?
China is more accessible
2016
China A 13.9%
2010
MAR
2.5%
OCT
Reforms are speeding up, making China accessible for foreign investors
JUL
NOV
2015
Investors can now directly invest in the Shenzhen market via Hong Kong, where 'new economy' companies have a greater presence
150
The world remains underinvested in China – but that’s about to change...
Flows are not one-way only! Increased demand from global investors will allow China to lift past restrictions of capital flows and gradually allow Chinese investors to rebalance their portfolios and go more global.
Offshore market
China opens up financial sector to foreign institutions
0%
0.0%
Stepping into the future
OCT
250
USD bn
Stepping into the future
Where to Invest
2012
3084
billion inflows
Shenzhen-Hong Kong Stock Connect launches
2008
China 28.5%
Click on dates to see the impact of the reforms
2018
OCT
2017
2016
Quotas for Shanghai- Hong Kong Stock Connect removed
EMD - USD benchmark weight
MSCI A-share inclusion
2017
Bond Connect launches
Silver population, golden opportunity
Before June 2018, China A shares are not part of MSCI indices.
Onshore market
2016
UBS Asset Management
RQFII quota
234 stocks will be included in MSCI's Emerging Markets index, the first time A-shares have been included in a major global index
China A 0.78%
Total as % of A-share mkt cap (RHS)
Foreign investors’ holdings of A-shares
China
Size of market
Hayden Briscoe, Head of Fixed Income APAC, explains.
China equities are being included in major indices
H-shares
2020: 100% of 234 A-shares*
Bloomberg announces plan to include 300+ onshore bonds in global bond benchmark
The long and short of it
JUL
billion
China
2010
Bloomberg's inclusion alone is estimated to bring USD 140 billion of inflows. Wider inclusion in other benchmarks will boost inflows further, with an estimated total of USD 250 billion to 300 billion at full inclusion.
China fixed income – high yield, direct access
2016
2017
14.8%
Where to invest
JUL
0.5%
2017
Foreign raters can evaluate domestic firms, a move which is expected to increase the rigor of company evaluation and raise corporate standards
Bloomberg announces plan to include 300+ onshore bonds in global bond benchmark
2014
An “All China” approach...
China 25.1%
At the end of May, MSCI included 234 China A-shares into its Emerging Market index. The weighting of A-shares will gradually be increased from 5% today. Once at full weight, A-shares could make up close to 14% of the MSCI EM index. And full inclusion could trigger inflows of up to USD 370 billion.
2018
3.0%
2016
200
1.0%
The RMB becomes considered as a global trading currency, marking a change in attitude from the IMF, which had previously judged the RMB as unqualified to be a global unit of account
300
*Based on free float market-cap of A-share stocks to be included, and a 30% upper limit of foreign ownership. Source: MSCI, UBS, May 2018
EMD - local markets benchmark weight
Global indices are including onshore China asset classes in their benchmarks. That's going to unleash a wave of foreign capital into onshore markets and investors need to be positioned in China before this happens because the net flow effect is likely to boost fixed income and equity prices.
Global Aggregate benchmark weight
25%
We've seen a sustained economic reform drive in recent years, and this has accelerated in the past year, making China more accessible than ever.
2017
OCT
Source: Schroders, Dec 2017
0
Source: State Street, March 2018, Schroders, March 2018, UBS Asset Management
China 17.3%
...because landmark changes are integrating China's onshore equity and fixed income markets into global markets, which could trigger inflows of over
2017
2016
2.0%
USD0.7tn
Foreign ownership of Chinese debt
100
Investors are responding
With access to China's domestic equities becoming easier, the distinction of onshore and offshore stock markets is becoming less important. We believe investors should increasingly consider to invest in both markets.
Not to scale, for illustrative purposes only. Sources: Global GDP data from World Bank, 2017; MSCI data as at February, 2018 Foreign ownership: Standard Chartered Bank, as of 7 September 7, 2017 EMD: (i) USD bonds. EMBI = JPMorgan EMBI Global Diversified . (ii) Local market bonds. JPMorgan GBI-EM Diversified; as of 13 March 2018 Global Aggregate = Bloomberg Barclays Global Aggregate; as at 7 September 2018 ACWI = All Country World Index, EMD = Emerging Market Debt
MSCI ACWI benchmark weight
$370
There's a mismatch between China's weight in the global economy and its share of the global investible universe, despite China's rapid growth in recent years and emergence as the world's main source of growth.
Index inclusion – Bringing China into focus
Up to
Home
Overseas institutional holdings of onshore bonds have doubled from RMB 674 billion in Jan 2016 to RMB 1.361 trillion in Mar 2018.
Index inclusion – Bringing China into focus
Index inclusion
RMB
Silver population, golden opportunity
Bond Connect
Compared to global markets,China fixed income historically has offered...
674
6 years
Onshore markets are now directly accessible after a series of reforms
Home
USD
5-Year Bond Futures Contract
China fixed income – high yield, direct access
China
China's onshore bond market is growing rapidly, expanding 6x between 2008 and 2018
China's onshore bond markets are highly attractive because they have historically offered higher yields, shorter duration and lower volatility.
10
30
Foreign investors wouldn't and couldn't access this market – but this is changing, opening up opportunities to global investors.
China
~
3.0%
China fixed income – high yield, direct access
2018
50
RMB tn
Dive deeper
China
trillion
For professional clients / qualified / institutional investors only
The long and short of it
Stepping into the future
Global
China Interbank Bond Market
3.1%
RMB volatility is low and we see strong long-term demand prospects for the currency as the internationalization process continues.
Financial market reforms
billion
The RMB has a strong long-term case. We're expecting global demand for the currency to increase because of:
Where to Invest
6.5 years
China
Overseas investors are switching to China
300
Source: Wind, February 2018
Access isn't a problem because recent reforms have made the market directly accessible.
Lower volatility
Silver population, golden opportunity
The Hong Kong Exchange introduced a RMB-denominated 5-Year Bond Futures Contract in April 2017, the first offshore futures contract on domestic Chinese government bonds, to meet international investors’ demand for tools to manage RMB interest rate risk.
The Bond Connect program launched in July 2017 and brought overseas investors an alternative, offshore-based channel into China's bond markets. Different to the CIBM Direct scheme, international investors can largely handle their trades offshore and is a comparatively streamlined process.
2.2%
billion
China fixed income – high yield, direct access
4.4%
Petroyuan
Stepping into the future
US
Index inclusion – Bringing China into focus
RMB
UBS Asset Management
4.2 years
Now that reforms are in place, demand for onshore bonds is set to grow
Global indices are including onshore bonds into their benchmarks, potentially triggering inflows of up to
Index inclusion is positive for the market, but investors should consider allocating now because the mass buying it will trigger will likely decrease yields and boost bond prices.
The China Interbank Bond Market (CIBM) Direct program launched in February 2016 and gave overseas institutional investors quota-free access to CIBM, which is c. 90% of China's onshore bond market. CIBM Direct handles trades through a mixture of offshore and onshore parties.
5.8%
1.361
Higher yields
~
Where to invest
Shorter duration
Note: Aggregate bond indices Source: Barclays Live, as of March 31, 2018. Correlation, Return, and Volatility based on 10 years of monthly total return
0
20
1.9%
60
40
70
Reforms are improving access and propelling rapid growth in China's onshore fixed income market. For years, China's onshore bond market has been a domestic affair.
2008
Source: Bloomberg, April 2018
Source: Ernst & Young, 2018
1.0
China's aged population is growing at a rapid rate, and should be the world's largest by some distance in 2030. The mass market of aged people should boost demand for healthcare services and products, as well as for insurance products and asset management services. As such, our equity strategies have a strong conviction on growth prospects for China's healthcare sector.
Home
For professional clients / qualified / institutional investors only
0.5%
China fixed income – high yield, direct access
Index inclusion – Bringing China into focus
The challenge ahead
0.2
Rest of the world
Silver population, golden opportunity
8.0
China
The long and short of it
Japan
China
0.5
Silver population, golden opportunity
USD 2.5 tn
Insurance penetration
1%
Demand for asset management services should also rise as investment in insurance and pension services grows.
Stepping into the future
3.5%
Compounded annual growth rate (CAGR) (%) in 65+ Population, 2015-2030 (RHS)
China's insurance market penetration is low by international standards...
1.5%
3.6
2.5%
Public and private spending on healthcare will likely rise to meet demand from the growing aged population. China’s healthcare market is expected to grow from RMB 4.9 trillion (USD 780 billion) in 2017 to RMB 16 trillion (USD 2.5 trillion) by 2030.
22%
Japan
No other major country's 65+ population is expected to grow at the speed or magnitude that China's will between now and 2030. The sheer size of the 65+ demographic means more cases of age-associated health conditions. For example: an estimated 150.6 million Chinese will have diabetes in 2040 – up 37% since 2015. Annual increase in population above 65 between 2015 - 2030 (million)
2030
5.0
Home
7.0
3.0
Source: World Health Organization 2014, China Daily 2018, Bain & Company: China Healthcare Outlook, UBS Asset Management
4.0%
US
Stepping into the future
UK
45%
0.2
Dive deeper
India
Where to Invest
0.7%
1.8%
Forecasted growth in AUM* between 2016 and 2030 (%)
2.9%
USD 780 bn
...but that is set to grow as demographic pressure grows, pension reforms take hold, and middle-to-higher income residents look for superior coverage compared to state pension programs.
Source: UN World Population Forecasts, 2017, UBS Asset Management
1.0%
7.4
4.1%
UBS Asset Management
But also an opportunity – look at healthcare...
2.0
Asset management set to benefit
Silver population, golden opportunity
Index inclusion – Bringing China into focus
Where to invest
2.3%
17%
0.0%
Source: UN World Population Forecasts, International Diabetes Federation, 2017, UBS Asset Management
China fixed income – high yield, direct access
4.5%
2017
6.0
The world’s population is getting older and China is the main driving force. By 2030, there will be 110 million more 65+ people in China, accounting for close to a third of the 385 million increase in the global 65+ demographic by that time.
Rest of APAC
3.7%
5%
Source: Casey Quirk, 2017 *AUM = Assets under management
0.0
Russia
4.0
9.0
Gross written premiums as % of GDP
3.0%
China spends 5.5% of GDP on healthcare and that has room to rise because it lags developed markets like Japan (10.2%) and the US (17.1%).
1.7
UK
2.0%
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Dynamically riding the tide – floating rate bonds
Stepping into the future
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China fixed income – high yield, direct access
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Silver population, golden opportunity
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Index inclusion – Bringing China into focus
Finding income in a shifting market
Index inclusion – Bringing China into focus
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Silver population, golden opportunity
Stepping into the future
For professional clients / qualified / institutional investors only
China fixed income – high yield, direct access
