Pension Funds Letter 14 - The Red Dragon continues its ascent

Summary

Editorial

The Red Dragon continues its ascent

In this latest edition of Amundi Pension Fund Letter we turn our gaze to China. The world’s second largest economy since 2010, China is now emerging from the United States’ shadow and may well become the world’s leading economic power by 2030.

China’s prospective position in the new international order has also been highlighted by the recent conflict in Ukraine. After an initial passive stance to the crisis, it has shifted to becoming strategically neutral. Its intervention is a game-changer and a role as a mediator would affirm its position as a global geopolitical power.

The search for Common Prosperity has seen many recent regulatory adjustments and crackdowns, which may have led some to be deterred from investing in the country. We explore these impacts and what this might mean for China’s growth and economic prospects.

China’s increasing global prominence across all spheres means it can no longer be overlooked by global investors, particularly as a diversifier given its low correlation to developed markets. But what is the best way for investors to gain exposure and take advantage of China’s compelling domestic demand and growth story?

Aside from the investment rationale, consideration should also be given to how international institutional investors, such as pension funds, can access the Chinese financial markets. Whilst the percentage of foreign investment in domestic Chinese assets has grown in recent years, the overall exposure remains low and well below the relative share of China in the global economy. We look at how this has evolved and the different options available to pension funds wanting to gain access.

We then turn to the developments in China’s own pension system, the world’s largest, and the reforms it has put in place as it tries to address its challenges in inequality and demographics.

This edition wraps up with our regular focus on pension funding ratios. While funding ratios of European pension funds have continued improving since our last Pension Fund Letter in December 2021, the future developments in the current bear market remain to be seen.

In brief, this edition highlights that regardless of the standpoint, China’s influence at a global level has grown significantly and it can no longer be regarded as a peripheral or emerging participant on the world stage.

EXECUTIVE SUMMARY