One clear trend from OMFIF’s surveys of almost 100 central banks, public pension funds and sovereign funds last year was that public investors are turning their backs on China. Will this trend continue in 2025 or will they reconsider their stance?
OMFIF’s Global Public Funds 2024 report highlighted that China, once a cornerstone of emerging market allocations, is rapidly losing favour among public pension and sovereign funds. Not a single surveyed fund identified China as the most attractive emerging market in 2024, a steep drop from 23% in 2023.
The shift in sentiment has already triggered concrete actions. For instance, Singapore’s Temasek has reduced its underlying portfolio exposure to China to 19% in 2024, from 29% in 2020. Similarly, major Canadian pension funds have ceased direct investments in China altogether and the Federal Retirement Thrift Investment Board has decided to exclude China from its international equity benchmark.
Within emerging market allocations, India stands out as the primary beneficiary of China’s demise. Over half of the public funds we surveyed in 2024 consider it to be the most attractive emerging market, up from 38% in 2023. Several institutions are expanding operations in India, reflecting a broader shift in the perception of risks and opportunities across two prominent Asian economies.
Reluctance towards the renminbi
The cooling sentiment on China extends to central banks as well. In OMFIF’s Global Public Investor 2024 survey of over 70 central banks globally, only a net 2% of the respondents anticipate increasing their renminbi allocations in the next two years, a sharp fall from 10% in 2023, and 30% in 2022.
Moreover, 12% of respondents are looking to reduce their renminbi holdings – the first such clear negative signal since our surveys began. The picture isn’t entirely bleak for China’s currency. Long-term projections suggest the renminbi’s share of global reserves could more than double to 5.6% over the next decade, up from its current 2.3%. Additionally, 30% of the reserve managers surveyed look to increase renminbi holdings over the next 10 years. However, this modest increase over a long time horizon indicates that the currency is unlikely to seriously challenge the dollar’s global dominance anytime soon.
The current outlook reflects widespread concerns about China’s investment landscape. For central bank reserve managers and global public funds alike, market transparency and geopolitical risks top the list of worries. Over 70% of reserve managers surveyed point to these factors as their primary deterrents to investing in Chinese assets. Moreover, only 23% of reserve managers saw potential for higher relative returns from Chinese financial assets, much less compared to 64% who see similar potential in the US.
Causes for concern in 2025
Looking ahead to 2025, questions about investor sentiment towards China continue to be raised. Geopolitical risks have becoming more acute with the impending administration of US president-elect Donald Trump. The possibility of increased tariffs on Chinese exports and further restrictions on technology transfers will presumably lead to further geopolitical tensions. Against that backdrop, 2024 may prove to be just the beginning of a broader strategic retreat away from Chinese assets for global public investors who are wary of a fracturing world economy.
Furthering compounding geopolitical risks, there is caution around China due to domestic economic and financial market headwinds. Even before the threat of an escalation in the trade war, Mark Delaney, chief investment officer of AustralianSuper, stated at a Bloomberg event in October 2024 that ‘the big boom times in China growth are gone’.
While Beijing is expected to deploy both monetary and fiscal stimulus measures to cushion the blow from tariffs and bolster domestic demand, the interventions may prove insufficient to meaningfully alter the economy’s long-term structural slowdown. A prolonged trade war and further economic weakness in China may prompt continued underperformance of China’s financial markets which would dissuade investment into the country by official institutions.
One pressing question is that, if there is reduced investment in China, what are the alternatives for public investors? One possibility for public pension and sovereign funds is continued inflows into India as an emerging market bright spot. Another option could see public investors doubling down on the US and the dollar, given its enduring dominance in global financial markets. Finally, gold may receive renewed demand, offering a geopolitical hedge for those wary of both China and the US.
Arunima Sharan is Senior Economist and Yara Aziz is Economist, Economic and Monetary Policy Institute at OMFIF.
