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China’s Shaky Economy Is Creating New Opportunities For Family Office Investors

Feb 11, 2020 China’s economy is expected to slow down considerably while its population ages rapidly. This shift in the world’s second largest economy could boost returns for family offices and institutional investors on Chinese government bonds, according to some experts.

In the third quarter of 2019, China reported 6% year-on-year growth in gross domestic product (GDP). That was the country’s slowest pace of economic expansion in 28 years, according to investment firm Schroder’s.

The ongoing trade war with the United States and the coronavirus outbreak aren’t the only challenges. China’s demographics seem to be the key reason for its recent slowdown. Official government figures showed that the country’s birth rate fell to its lowest point ever – only 10.5 new births per thousand Chinese people were recorded in 2019.

At this rate, China’s population is expected to start shrinking before the end of the decade. Meanwhile, China’s median age will surpass the U.S. this year, according to the Economist. Fewer people and an older population will limit China’s labor force, leading to a decline in its production and consumption rate.

“There is no question that China’s aging demographics and slowing growth will make it harder to avoid the persistent Japanification that has accelerated in the wake of the country’s major post-crisis stimulus,” says Dr. Parag Khanna, Managing Partner of FutureMap and author of The Future is Asian.

The term Japanification refers to the economic consequences of a similar demographic shift in Japan. Japan’s population has been rapidly shrinking and ageing since the 1990’s, which has stymied the country’s economic growth. This had knock-on effects on property values and the stock market. However, one domestic asset class outperformed the rest: government bonds.

A smaller and older population tends to save more to fund retirement, according to research by the Federal Reserve Bank of San Francisco. This boosts demand for government bonds. If the theory holds up, Chinese government bonds could follow a similar trajectory and become one of the country’s best-performing asset classes in the years ahead.

China’s 10-year government bond currently offers a yield of 2.8%, compared to 1.59% for the 10-year US treasury. Despite this gap in potential income, global family offices and institutional investors have limited exposure to the asset due to Chinese government’s restrictions on foriegn investment. Now, the Communist Party of China (CPC) is relaxing restrictions and opening up the bond market, which could triple the amount of foreign investment in government bonds, according to HSBC Global Asset Management.

“The composition of China’s debt favors its ability to restructure state-owned corporations while sovereign debt is low,” says Dr. Khanna. “Furthermore, the ongoing capital account liberalization will provide a fresh influx of investment.”

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