- BlackRock lowered its view on Chinese equities to neutral from overweight on Monday.
- Risks are rising for China over its ties with Russia during the war in Ukraine, the fund manager said.
- COVID-related lockdowns also threaten to slow activity in the world’s second-largest economy.
China’s ties to Russia and a declining growth outlook for the world’s second-largest economy prompted BlackRock to downgrade its view on Chinese stocks and bonds on Monday.
The tactical view on Chinese equities and debt moved from slightly overweight to neutral over a six to twelve month period. Investment grade debt and European government bonds were upgraded to neutral.
“We see growing geopolitical concern over Beijing’s ties to Russia. This means foreign investors could face more pressure to avoid Chinese assets for regulatory or other reasons,” BlackRock said.
The Chinese Foreign Ministry said last month that it “strengthen strategic coordination” with Russia no matter what, after Moscow was hit by a range of western sanctions for his invasion of Ukraine at the end of February.
Trade between China and Russia increased by about 30 percent to about $38 billion in the first quarter of 2022, according to Vice Foreign Minister Le Yucheng. Chinese exports to Russia include electronics and machinery, while Russia sells oil and other raw materials to China, the world’s largest oil importer.
Investors have also been spooked by Beijing’s crackdown on the
contributing to the 18% drop in the MSCI China index this year through the end of April.
“Previously, we kept our modest overweight in Chinese assets because we saw improved valuations offsetting the risks. The rapid deterioration of China’s growth outlook on widespread lockdowns to limit a COVID spike has been a game-changer,” said Jean Boivin, director of the BlackRock Investment Institute. , in a weekly note published on Monday. “Chinese policymakers have announced an easing to prevent a slowdown in growth – but have yet to fully act.”
China has pledged to implement a zero-tolerance policy in the fight against this year’s wave of coronavirus infections, prompting authorities to impose lockdowns affecting millions of people in Shanghai and other regions, including including the manufacturing center in Shenzhen. Earlier this year, China forecast economic expansion of 5.5%, the lowest target since 1991.
Meanwhile, yields on Chinese government bonds fell below those on US Treasuries, “eroding their previous appeal as a source of potential coupon income,” BlackRock said.
The Federal Reserve’s fight against inflation prompted the Fed to begin raising interest rates, which sent US Treasury yields skyrocketing. The widely watched 10-year bond yield topped 3% for the first time since 2018.