Slight warming trend predicted to defrost global tensions a bit

U.S.-China tensions are likely to come off the boil under an incoming Joe Biden administration, easing the way for global money managers and institutional investors alike to deepen their ties with the mainland over the coming year.

That improvement could depend as much on matters of style as on substance, auguring a relationship that — even if considerably more contentious than its pre-Trump incarnation — can be pursued in a business-friendly way.

"Tariffs by tweet" are likely to give way to a more predictable policy process — a good development for markets, said Paul Hsiao, Hong Kong-based economist with PineBridge Investments LLC. New York-based PineBridge managed $111.7 billion in client assets as of Sept. 30.

Bilateral support in the U.S. for a tough approach to China could leave Trump administration policies on national security, intellectual property and technology transfers largely in place but more communication and dialogue will allow for better management of risks, agreed Wenli Zheng, Hong Kong-based vice president and portfolio manager of T. Rowe Price Inc.'s recently launched China Evolution Strategy Fund.

"A cooling off in government rhetoric" will allow business leaders in both countries to quietly resume normal operations, he predicted. Baltimore-based T. Rowe had assets under management of $1.42 trillion as of Nov. 30.

Heightened bilateral tensions — including, most recently, an executive order signed Nov. 12 by President Donald Trump forbidding U.S. investors from trading stocks or bonds of mainland companies linked to China's military — have impeded the pickup in U.S. institutional allocations to Chinese capital markets, some market veterans say.

For clients of New York-based investment consultant Segal Marco Advisors, mapping out how to get exposure to Chinese markets has remained "mostly a work in progress," not helped by a political climate marked by "China bashing and suggestions that owning certain companies would be a failure in the exercise of sound fiduciary practices," said Tim Barron, the firm's chief investment officer.

Some observers said they were seeing signs of a less disruptive geopolitical backdrop emerging as 2020 drew to a close.

Toward the end of the year, "we noticed … an abrupt turn of sentiment," with U.S. asset allocators becoming more positive on Asia and on China, said Robert Horrocks, CIO with San Francisco-based Matthews International Capital Management LLC.

That change in attitude was already apparent in Europe to a certain extent but "we hadn't seen it in the U.S. and we are seeing it now," Mr. Horrocks said. As of Sept. 30, more than 44% of Matthews Asia's AUM was invested in Chinese and Hong Kong companies, with the bulk of the firm's $26.5 billion total invested on behalf of U.S. clients.

China's success, meanwhile, in snuffing out the coronavirus within months of its outbreak in February — paving the way for a faster economic rebound than anywhere else in the world — should continue to provide a tailwind for institutional allocations during the coming year, analysts predict.

"The divergence in economic growth, yields and corporate health in China vs. the world" drove capital flows into mainland stocks and bonds over the latest year and with yield spreads of roughly 2 to 3 percentage points in China's favor likely to persist, long-term flows should continue over the coming year, said Alicia Garcia-Herrero, Hong Kong-based chief economist, Asia-Pacific, with Natixis Corporate and Investment Bank.

Kevin Anderson, State Street Global Advisors' Hong Kong-based head of investments for Asia-Pacific, said for 2021, corporate earnings growth globally will need to prove "resilient" to justify the heights stock prices attained this year predominantly on the strength of monetary policy easing.

On that score, Chinese companies will likely offer investors opportunities second only to the U.S. market amid government policies emphasizing growth powered by domestic consumption, Mr. Anderson said. For a year in which earnings resilience will be key to driving market returns, "we think China deserves to be a focus for investors," he said.

Boston-based SSGA had AUM of $3.15 trillion as of Sept. 30.

T. Rowe's Mr. Zheng likewise called the outlook for Chinese equities positive, noting that year-on-year gains in auto sales, a recovery in household income and improving consumer confidence all point to domestic consumption playing a bigger role in driving China's growth over the coming year.

A consensus that the U.S. dollar could weaken further next year amid pledges by U.S. Federal Reserve Board Chairman Jerome Powell not to raise interest rates anytime soon will likewise add to the attractiveness of yuan-based investments, market players say.

If calmer U.S.-China ties are set to pave the way for greater portfolio flows, they could likewise provide a tailwind for the ongoing efforts of global money managers to build businesses on the mainland, some executives contend.

A more orderly, predictable geopolitical backdrop will provide "a much better environment" for foreign money managers looking to expedite their plans on the mainland, said Thomas Cheong, Hong Kong-based president of Principal Financial Group Inc.'s business in Asia.

While a handful of big global managers took advantage of reforms allowing foreign managers to become 100% owners of mainland-based fund management companies starting in April 2020, "I think you will start to see more," reflecting greater confidence in a more stable geopolitical environment, Mr. Cheong said.

BlackRock Inc., to date, is the only global manager among that handful to have garnered approval from the Beijing-based China Securities Regulatory Commission to set up a wholly owned fund management company.

Others — including Fidelity International and Neuberger Berman LLC — have had their applications accepted but await final approval.

For global managers, "a lot of groundbreaking stuff will take place" over the coming year as they launch their first mutual funds on the mainland, necessitating key decisions on the type of products brought to market and the distribution channels to be used, said Patrick Liu, Shanghai-based head of China and general manager of Neuberger Berman Investment Management (Shanghai) Ltd. New York-based Neuberger reported AUM of $373.9 billion as of Sept. 30.

"You start to have a sense of direction — where the business should be going, what might be the opportunities and what might be the risks and challenges down the road," even if the local industry remains at a "early stage" as the new year dawns, Mr. Liu said.

Desiree Wang, Shanghai-based managing director and head of China with J.P. Morgan Asset Management, struck a similar tone, saying "international players are only now starting to be able to deepen their participation in the local market." The lifting of ownership limits for foreign managers this year will ultimately be seen as just the beginning of more robust reforms in coming years, she added.

New York-based JPMAM had AUM of $2.19 trillion as of Sept. 30.

One of the latest reforms holding promise now for global managers is the Greater Bay Area Wealth Management Connect pilot program announced by Chinese regulators on June 29, Ms. Wang said.

Among other things, the program will allow the more than 60 million inhabitants of China's bustling Guangdong province to invest in wealth management products offered by banks in Hong Kong, giving them unprecedented access to overseas markets.

Principal's Mr. Cheong said while the Greater Bay Area Wealth Management Connect program is for retail investors as currently conceived, it holds the promise of allowing investors on the mainland a degree of overseas diversification for Pillar 3 fund-of-funds retirement products that could offer "an attractive value proposition for people who want to stay for the long term."

Analysts predict the fund-of-funds products China's regulators started backing in recent years as a private retirement pillar will become an increasingly important keystone for the retirement security of Chinese citizens.