While China’s economy displays signs of fragility, its effect on investments in emerging market (EM) bonds has proven to be minor. Pictet uncovers three primary reasons which empower investors to stay put and not press the panic button.

Firstly, the asset manager feels that China’s economic prospects are not as challenging as they seem. While the country’s real estate sector is suffering, its domestic and international tourism sector has reached pre-pandemic levels. Furthermore, Pictet asserts that China boasts substantial public investments and a resilient service sector.

Echo Chen, Investment Analyst at Pictet, points out that Chinese authorities have slashed mortgage rates from their peak to support the weak real estate market. She contends that authorities also plan to proactively enhance the counter-cyclical measures, helping young jobseekers and easing purchase restrictions.

Though economists have downgraded China’s growth projections for 2023, Pictet notes that the rate remains superior to that of the previous year. Chen says, “This, in turn, should help emerging market bonds more broadly to retain an attractive growth differential relative to their developed peers – to the benefit of EM sovereign and corporate bonds.”

Meanwhile, Sabrina Jacobs, Senior Client Portfolio Manager at Pictet, highlights how China’s dominance in the EM market has faded. She does so by highlighting the fact that several emerging economies have de-coupled from the country after its zero-Covid policy. According to her, Chinese demand for commodities was a major decisive factor for emerging markets back in 2000. However, things have changed today.

“Nowadays, EM is a much more diverse group and has a much more balanced ratio of commodity exporters and importers. Therefore, today’s lack of commodity demand from China is much less of a problem for the rest of EM than would have been the case 10 or 20 years ago,” she adds.

Subsequently, Pictet opines that other countries like India and Indonesia are seeing improvement in economic growth, largely due to domestic factors and because Beijing is losing out on investments due to geopolitical tensions. Additionally, Pictet identifies substantial growth potential in regions like Nigeria and Zambia.

According to the asset manager, despite a few challenges, China continues to be an integral part of the diversified EM portfolio. Chen reiterates, “Prospects for emerging market debt remain strong, with some attractive opportunities to be found within China and many more beyond it.”

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