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Global investors place trillion-renminbi bet in China breakthrough

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Despite a global coronavirus pandemic that began in China, 2020 has transformed into the year it all came together for the country’s capital markets, as foreign investors snapped up more than Rmb1tn worth of stocks and bonds.

China’s benchmark CSI 300 index is up about 27 per cent this year, in dollar terms, beating the S&P 500 by more than 13 percentage points. Shenzhen’s tech-focused ChiNext has risen some 59 per cent, on the same basis, exceeding even the runaway US tech benchmark, the Nasdaq Composite. Chinese government bonds have also drawn new fans with their rare source of yield.

The $150bn-worth of inflows, which came through Hong Kong programmes that connect investors to the mainland, mark a contrast with January, when Chinese stocks were the first in the world to feel the heat from the pandemic. Investors say the surge is likely to keep coming.

“I’ve been in Asia for 20 years and for most of that time period it’s been pretty challenging to get investors to look at the onshore market,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Standard Investments.

This year dealt a harsh lesson to those who hesitated to match global benchmarks’ increased weightings for Chinese securities, he said. “For any emerging markets investor that’s been underweight [on China] it’s been quite a painful trade.”

China’s bond market in particular has been a massive draw for investors during the pandemic thanks to reforms to open up the country’s financial system and Beijing’s initially sluggish but ultimately decisive response to the Covid-19 outbreak.

Harsh lockdowns across the country proved sufficient to get the economy back up and running near full capacity in the second half of 2020 — even as the rest of the world struggled to bring the virus’s spread under control.

“China is much further along its post-Covid recovery path,” said Paul Colwell, head of Asia advisory portfolio group at Willis Towers Watson. “The way policymakers act in response to changes in the economy, monetary policy, fiscal policy . . . China operates at a fundamentally different frequency to the rest of the world,” he added.

With China’s growth returning to pre-Covid levels and domestic consumption picking up, the central bank has been able to leave its benchmark interest rates almost untouched while others cut theirs hard or launched bond-buying programmes that crammed yields close to zero.

That meant China was the only game in town for debt investors seeking returns. Foreign holdings of Chinese government debt through the market link in Hong Kong grew by more than Rmb900bn in the first 11 months of 2020.

Sameer Goel, a macro strategist at Deutsche Bank, said foreign bond-buying this year was “even larger than what one would’ve expected” from passive flows after global benchmarks began including Chinese government debt in 2019.

Mr Goel said foreign buying of onshore bonds, which will get another boost next year from incorporation into FTSE Russell’s influential World Government Bond index, had helped drive a record six-month rally for the renminbi.

Line chart of Yield on 10-year sovereign bonds (%) showing China's central bank keeps its powder dry during the pandemic

“Pent-up demand among global investors who wish to diversify away from the US dollar” is helping to support the Chinese currency, said Julia Ho, head of Asian macro at Schroders.

That growing confidence in the renminbi, which had taken a series of sharp falls in recent years as the US-China trade war intensified, has also helped ease investor apprehension over Chinese equities, which are among 2020’s best performers.

Equity inflows, although much smaller than those in the bond market, are now positive after outflows earlier this year. Since Donald Trump lost November’s US presidential election, setting up almost certainly calmer US-China relations, buying appetite has strengthened, with net foreign purchases of Chinese equities through a stock connect programme in Hong Kong swinging back up to about Rmb170bn ($26bn) this year.

Joe Biden’s victory helped push the benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks up 6 per cent in November.

Even in spite of rising tensions, flows into China have run at a rapid pace throughout the Trump presidency, with total inflows of over $620bn over his four years in office. Similarly, the number of Chinese IPOs in the US grew faster under Trump than it had under Barack Obama. But the country faces growing bipartisan hostility in Washington, and Mr Biden has said he will not immediately lift Mr Trump’s trade tariffs.

Line chart of Net purchases of Chinese equities via stock connect programme YTD ($bn) showing Biden win spurs return to Chinese stocks

“The stance will remain adverse”, said Thomas Gatley, an analyst at Gavekal Dragonomics in Beijing.

A global vaccine rollout could also undermine China’s competitive edge as one of the few major functioning global export economies, Mr Gatley added.

Recent bond defaults by cash-strapped state-owned enterprises, once thought to be fully guaranteed by Beijing, have also alarmed some local investors, who fear policymakers’ desire for fiscal discipline is returning. This could lead to more caution from investors, said Michelle Lam, senior China economist at Société Générale, “and this tightening of credit conditions will be negative for growth”.

But Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management, suggests that China is positioned for both positive and negative scenarios for the coronavirus, and that global flows into the country are “just going to accelerate”.

“The number of conversations we’re having with clients is just ever-increasing,” he said. “People are making their first standalone allocations in China.”



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Israel conflict rattles rapprochement with Arab countries

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When the United Arab Emirates shocked the Arab world by normalising relations with Israel it said the move would help ease the protracted Arab-Israeli conflict. But nine months later, the wealthy Gulf state finds itself in a difficult position as its newest ally bombards the impoverished Palestinian territory of Gaza.

Israeli war planes and artillery have been pounding Gaza while Hamas, the group that controls the territory, has fired rockets into Israel. On Sunday morning, death toll in Gaza stood at 181, including 83 women and children, local health officials said.

Ten people have died inside Israel, including two children, local medics have said.

While almost a third of Arab countries now have relations with Israel, this week’s bloodshed shows that diplomatic ties ushered in by last year’s so-called Abraham Accords have given them little leverage and done nothing to ease the root cause of the protracted crisis — the Jewish state’s conflict with the Palestinians.

“They [the UAE] are clearly in a very difficult position. On one hand, the UAE’s interests with Israel are long term and strategic, so ideally their relations should be resilient to shocks,” said Cinzia Bianco, a visiting fellow at the European Council on Foreign Relations. “At the same time, the UAE obviously claimed that the Abraham Accords would give them leverage to also support the Palestinians and rein in Israel’s aggressions against them.”

So far, Israel has rejected all international efforts pushing for a ceasefire. But Bianco said Abu Dhabi could still deploy diplomatic leverage to pressure the Jewish state to limit the scale of its retaliation. Such intervention, however, could jeopardise progress on joint projects of strategic value to the UAE, she added. 

Recent collaborations include plans for Emirati and Israeli defence manufacturers to develop a system to counter drones.

The normalisation of relations between Israel and the UAE under the Abraham Accords was quickly followed by similar moves from Bahrain, Sudan and Morocco, that marked a radical departure from the established Arab stance towards the Jewish state.

The Arab position before the accords was that they would recognise Israel only if there was a just settlement with the Palestinians that led to the creation of a viable Palestinian state. The transactional deals brokered by the Trump administration, which pursued an overtly pro-Israel stance, left the Palestinians feeling isolated and betrayed. Critics said Arab states had given up a bargaining tool and gained little in return, warning the moves would be exploited by more militant Palestinian factions.

Like other members of the Arab League, the UAE endorsed an appeal on Tuesday to the International Criminal Court to “investigate war crimes and crimes against humanity” committed by Israel against the Palestinians.

“The UAE stands with the rights of Palestinians, for the end of the Israeli occupation and with a two-state solution with an independent Palestinian state with East Jerusalem as its capital,” said Anwar Gargash, diplomatic adviser to the UAE president, this week. “This is a historic and principled position that does not budge.”

The UAE foreign ministry was last month quick to condemn Israeli plans to evict Palestinians from their homes on land claimed by Israeli settlers. And when clashes broke out between armed Israeli police and rock-throwing Palestinian youths, the UAE urged Israeli authorities to reduce tensions.

The UAE’s clear public stance has given cover for Emiratis and residents in the autocratic state to condemn Israeli actions and express support for the Palestinians, after any local anger at the earlier decision to normalise relations was suppressed at the time. Apart from a fringe of Emirati online activists who have sided with Israel, most social media reaction — even from some ministers — has been pro-Palestinian.

“Normalisation [of relations] is irreversible but it is very difficult to defend and even talk about in these circumstances,” said Abdulkhaleq Abdulla, a Dubai-based political science professor.

After the UAE signed its accord, there was speculation about whether Saudi Arabia, Israel’s main prize, would follow suit. Like Abu Dhabi, Riyadh has been covertly co-operating with Israel on intelligence and security matters as they share the goal of countering Iran.

But this week’s Israeli assault on Gaza makes that appear ever more remote. Saudi foreign minister Prince Faisal bin Farhan on Sunday said the kingdom “categorically rejects the Israeli violations against Palestinians”, while calling for an immediate ceasefire. 

In Morocco, which established relations with the Jewish state in October in return for US recognition of Moroccan sovereignty over the disputed territory of Western Sahara, the foreign ministry said it was watching events “with deep concern”.

In 2014, during the last major war between Israel and Hamas, thousands of protesters, including government ministers, took to the streets across Rabat, the capital. This time Moroccan police dispersed a small pro-Palestinian protest in the city this week. The newly formed Morocco-Israel Business Council was also reported to have postponed a virtual meeting aimed at encouraging Moroccan investment in Israel.

Public sentiment in the Arab world remained strongly pro-Palestinian, said HA Hellyer, senior associate fellow at the Carnegie Endowment for International Peace. “The absence of protests isn’t an absence of the desire to protest but an absence of permission to protest.”

Restrictions on freedom of speech across the region made it harder to gauge the extent of public anger, Hellyer said, but social media and the extensive coverage on mainstream television showed the “Palestinian question” was still close to Arabs’ hearts.

“Almost half of the messages I received on Thursday for the religious festival marking the end of Ramadan, show pictures of the Dome of the Rock in Jerusalem,” he added.



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Chilean voters prepare to elect country’s constitutional legislators

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Chile will this weekend vote in the legislators who will draw up its new constitution, with the country’s centre-right government facing a battle to maintain its grip on power ahead of a presidential election in November.

Gubernatorial, mayoral and municipal polls that were postponed because of the pandemic will also take place on Saturday and Sunday, alongside the election to populate the constitutional assembly.

Chile has not been spared the coronavirus second wave that has hit Latin America despite it having the highest vaccination rates in the region. Confirmed infections reached their highest ever level last month, although numbers have since declined.

“Chile is doing several historic and unprecedented things at the same time . . . in the middle of the economic and health crisis brought on by Covid-19,” said Robert Funk, a political scientist.

The most important vote will select members of the constituent assembly charged with rewriting the constitution drawn up during the 1973-90 dictatorship of General Augusto Pinochet — which most Chileans regard as illegitimate.

Nearly four-fifths of voters opted in favour of reforming the constitution in a referendum in November.

“These elections will probably define Chile’s institutional course over the coming decades,” said Gloria de la Fuente of Chile’s transparency council. “The vote will have a profound effect on Chile’s political system and civil society . . . electing the authorities to bring the country’s agenda forward.”

Yet turnover is predicted to be lower than the referendum. Some 58 per cent of Chileans who took part in a recent Ipsos poll said they were less likely to vote due to the pandemic, while less than half knew they would be voting for four different positions.

Chile has in recent decades become one of Latin America’s wealthiest nations, even if the deep inequality that sparked widespread social unrest in 2019 is far from resolved.

The low approval ratings for President Sebastián Piñera since those demonstrations have been exacerbated by defeats for his government in Congress, notably over pensions reform.

While the leftwing coalition that dominated Chile for most of the past 30 years has disintegrated since Piñera returned to power in 2018, his unpopularity could allow the left and centre-left to secure the two-thirds majority in the constituent assembly required to pass each article of the new document.

“If the right gets more than 30 per cent [in the assembly], it will be a tremendous victory,” said Lucia Dammert, a sociologist at the University of Santiago.

Despite the relative success of its vaccine rollout, Chile has been hard hit by the coronavirus crisis. Last summer’s peak of a weekly average of 352 daily cases per million was surpassed last month, reaching 383. Cases have since fallen back to about 280 cases per million.

However, Piñera’s government has been able to offer more generous Covid-related subsidies than most other countries in the region.

A feature of this weekend’s polls has been the emergence of independent candidates, Dammert said. Yet although the traditional parties had been badly wounded by the political turmoil, it would be “an uphill battle” for the independents to gain recognition, she said.

There are also wild cards such as Pablo Maltes — husband of Pamela Jiles, a populist presidential hopeful — who is running for governor of the metropolitan region of the capital Santiago.

“If Maltes wins, then there’s definitely something going on with Jiles,” said Funk, as it would suggest she was a strong contender for the presidency.

Jiles, who has championed measures to withdraw funds from Chile’s vaunted private pension system, is one of a number of presidential hopefuls, with no single candidate on the right or left enjoying a clear lead.

Electoral reform under the previous leftwing government of Michelle Bachelet that increased proportional representation means Chileans will for the first time also elect regional governors in a country where power has traditionally resided firmly in Santiago. The elections will also renew nearly a third of local authorities.



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China lands spacecraft on Mars

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China has landed a spacecraft containing a rover on Mars, according to state media, in a further sign of its bold ambitions in the sphere.

The rover was part of the Tianwen-1 unmanned mission launched in July last year. Tianwen means “questions to heaven” and was named after a poem by Chinese poet Qu Yuan.

The mission, which was described by Chinese media as a “new major milestone” and the “first step in China’s planetary exploration of the solar system”, was intended to match the US by successfully landing on the red planet.

The Global Times reported that the lander and the rover from the Tianwen-1 probe reached a plain on Mars called Utopia Planitia on early Saturday morning local time, citing information from the China National Space Administration.

The Tianwen-1 probe’s lander and rover separated with the orbiter at about 4am, after which it had a three hour flight before entering Mars’ atmosphere, according to the newspaper.

The spacecraft then “spent around nine minutes decelerating, hovering for obstacle avoidance and cushioning, before its soft landing”. The rover is named Zhurong after a Chinese god of fire, and is 1.85m and weighs 240kg. It is expected to transverse the planet for about 92 days.

The probe was launched into space on July 23 by the Long March 5 rocket from the Wenchang launch pad in Hainan province, in the south of the country.

The achievement of the Mars landing is part of a wider expansion of China’s space programme. The country’s engineers launched the first part of its permanent space station into the Earth’s orbit late last month.

In 2018, China for the first time launched more vessels into orbit than any other nation.

The US views China’s efforts in space in strategic terms. “Beijing is working to match or exceed US capabilities in space to gain the military, economic and prestige benefits that Washington has accrued from space leadership,” according to the annual threat assessment published by the office of the US director of national intelligence.



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