Reflections on COVID-19’s Impact on China’s Financial Markets
Investors who were underweight or not invested in Chinese stocks relative to their benchmark have found themselves underperforming. The yuan’s volatility has been relatively stable versus the US dollar, reducing potential return headwinds for US dollar-based investors, compared with other major markets. China can offer diversification within global stock and bond portfolios given low correlations with other major global markets.
Much has been written about COVID-19’s economic consequences for China, but here we especially look at the pandemic’s effect on China’s financial markets. For instance, how have China’s stock and bond markets performed on a global basis? What were the challenges that investors have had to confront during this crisis? Were there any divergences in experience between China and the other major markets? How does China look on a relative basis? These are some of the questions that we would like to address in this piece.
China’s financial markets managed to hold up reasonably well compared with their global counterparts as of end-May. For instance, Chinese equities outperformed other regional equities in the first four months of the year. In May, increased tensions between the United States (US) and China led to a slight underperformance of China relative to the US. However, MSCI China's year-to-date returns have been much better compared with its European, Pacific or emerging market (EM) peers. Additionally, MSCI China's volatility (rolling 60-day annualized volatility) remained lower at around 19% compared with around 33% for the US, 31% for Europe, 22% for EM and 24% for Pacific as of end-May.