8 BARRON’S February 15, 2021
But Rich Ross, Evercore ISI’s technical
guru, points to the 11.4% advance in China’s
blue-chip index, the CSI 300, already this
year. More important, the CSI is breaking
out to a record high, eclipsing its peak hit 13
years ago, he writes in a client note. That
makes China a “table-pounding buy” in a
world of what he calls “better bubbles” that
are “in their middle innings.”
That hasn’t gone undiscovered by global
investors, who continue to pour funds into
China’s stock and bond markets, according
to a research report by J.P. Morgan’s global
quantitative and derivatives strategy team,
led by Nikolaos Panigirtzoglou.
The pace of offshore buying picked up
markedly late last year in the expectation
of “the prospective shift from the Biden
administration to a less combative trade
policy and a greater focus on multilateral
agreements and institutions, as well as
[foreign-exchange] policy,” the JPM team
writes. President Joe Biden spoke by tele-
phone with Chinese President Xi Jinping
this past week for the first time since tak-
ing office. Biden raised “fundamental con-
cerns about Beijing’s coercive and unfair
economic practices,” according to a White
House statement.
Flows into Chinese bonds remained
strong in January after their inclusion in
major bond indexes late last year. Their
key attraction: high yields, including
3.26% for the 10-year maturity—more than
two percentage points over their U.S. coun-
terpart. Inflows into Chinese bonds totaled
$160 billion in 2020, up from $100 billion
in 2019 and 2018. In January alone, off-
shore buyers snapped up about $34 billion
worth, according to JPM.
Cumulative offshore inflows into Chi-
nese equities since the start ofNovember
total around $19 billion. While inflows
slowed in January to just over $6 billion
from $9 billion in December, the bank’s
strategists add that the pace has picked
up this month, to $5 billion as of the Feb.
11 report. In sum, offshore demand has
been driven by a desire for portfolio di-
versification even beyond China’s inclu-
sion in passive equity indexes in recent
years, they conclude.
Clearly, China is attracting capital be-
cause of its economic performance. Mea-
sured in dollars, its gross domestic product
grew by 2.3% last year, making its econ-
omy the only major one that expanded
during Covid-19-ravaged 2020. In contrast,
the U.S. economy contracted by 3.5%, its
most severe shrinkage since just after
World War II.
More important, China used 2020 “as
an opportunity to pole-vault itself for-
ward toward becoming a global economic
superpower,” says MacroMavens’ Stepha-
nie Pomboy. To accomplish that, Beijing is
working to transition from an export-led,
globally dependent economy to a self-suf-
ficient one, driven by domestic consump-
tion.
Key to that is China’s new willingness to
let state-owned enterprises fail, allowing
“creative destruction to allocate capital in
the most efficient and rational way possi-
ble,” she continues. Finally, Beijing has
emphasized a stronger renminbi, or yuan,
in order to make it a viable alternative to
the world’s reserve currencies.
The contrast with other nations’ empha-
sis on fiscal and monetary stimulus is
stark, Pomboy asserts. The People’s Bank
of China has barely expanded its balance
sheet, at $5.9 trillion, while the Fed’s has
ballooned to $7.4 trillion and the European
Central Bank’s has soared even higher, to
$8.6 trillion.
The dollar total of the PBOC balance
sheet also has risen because the greenback
has shrunk sharply against the yuan. Bei-
jing’s currency has appreciated 11.9% since
late May, boosting the purchasing power of
China’s citizens—contrary to the baseless
competitive-devaluation assertions of the
Trump administration.
China’s central bank actually has re-
duced its holdings of U.S. Treasury securi-
ties, to $1.09 trillion from $1.2 trillion in
- (If China were trying to push its cur-
rency, it would bebuyingdollar assets.) At
the same time, Beijing is accumulating
gold, although Pomboy notes that how
much it has is uncertain because China is
“notoriously slow in reporting its pur-
chases and holdings.”
To be sure, while Chinese stocks have
rallied back to their previous peak,
reached in 2007, BCA Research warns that
there could be near-termsetbacks. Mone-
tary policy remains relatively tight, in con-
trast to the super-easy Fed and ECB, while
an 8% economic growth target is mislead-
ingly high, coming off early 2020’s deep
contraction.
Chinese policy makers are wary of asset
inflation, and have become less tolerant of
the booming housing market that they
allowed last year to avoid a deep recession,
observes BCA. “As such, we maintain a
cautious view on Chinese stocks,” the ad-
visory concludes.
For now, however, the bull reigns in the
Year of the Ox.B
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Up & Down Wall Street Continued
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