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In the current slowdown, we look to the China credit impulse for hints on change-in-direction for the Chinese economy, and the latest numbers suggest that we are near a turning point. The credit impulse has been an excellent leading indicator since 2012 as it measures the change in credit rather than the stock in credit.

When we look at the difference between official cash rates and where the banks are lending to each other in the repo markets, we see a divergence. The bank lending rate is generally below the official cash rate. This tells us that Chinese banks are full of cash, and they are lending money out at much lower rates than official cash rates. So while the government is stimulating, that money has not made it into the real economy yet.

On many fronts actions have been on hold until after the new top level leadership was established at the Party Congress. In the weeks that followed the Party Congress, a suite of changes on China’s zero COVID policy and measures supporting the property sector brought more clarity. We take the move toward shorter quarantine time for inbound travelers and a more targeted COVID control regime as positive signs. While any immediate deviation from its zero COVID policy is unlikely, the forward-looking trajectory into next year now looks much more encouraging. And, the comprehensive real estate package is a departure from the more piecemeal approach of the past months and marks a significant shift in central regulator focus to cover broadly the stable development of the real estate market and its value chain—strong actions and a direct approach that we have been waiting for from Beijing.

The further expansion of bond guarantees for Chinese property developers, as well as the 16-point plan to support the property market will be positive for market sentiment in the near term, especially for developers that are still current on debts, and we have already seen a recent rebound in bond prices. Looking ahead, the key measure to look for further revaluation of the whole sector is still the recovery of property sales.

The Party Congress is an important milestone and it will take time before the full implications become clear. The high-level discussions on economic development point to a continuation of the principles that were set in the last five-year plan. These include a rotation from the speed of growth to the quality of growth, a better balance between efficiency and fairness, and a balance between development and security.

We expect to see a policy continuation with regard to the economy, with China continuing to focus on the quality of growth, which suggests that in the future, growth in China will be more driven by consumption and high-end manufacturing, rather than by further growth of debt. China’s gross domestic product (GDP) growth for this year could be around 3%, and, while slower than in previous years, this is also a natural result of a shift from the speed of growth to the quality of growth. In terms of fixed income , this should further enhance the credibility of China’s sovereign debt. It should also create more credit investment opportunities in sectors such as consumer, manufacturing and financials.

The next 30 years are likely to be very different from the past 30 . We will have to make significant changes in our investment approach in order to adapt. We see a paradigm shift coming because the key person is different, and we will have to adjust. Power is going to become more consolidated under President Xi after the Party Congress, and he has strong views and a strong will. Investors will have to make adjustments accordingly and determine what will work in future.

In the past, certain private companies did very well through overleverage and by gaining favor with government officials. In this new era, they will have to be competitive on their own strengths. The days of easy access to bank financing are gone. We will continue to look for and invest in strong, competitive companies that can stand on their own.

This year, China has faced much less inflation pressure than other countries. Many factors contribute to this. One is that China is a net exporter, and the other is that consumption has been relatively weak due to the COVID situation. As a result of those factors, China’s central bank has been cutting rates, while others have been hiking.This has two major investment implications. First, China is one of the few countries that have offered a positive real yield. And secondly, there are diversification benefits for investors if their global fixed income portfolios include Chinese government bonds.

In recent months, there has been a notable change. The economics of hedging the renminbi (CNY) into the US dollar (USD) has turned positive. Now, if investors hedge CNY into USD, there is a positive gain compared to it being a cost last year. The relative prices have depended on the interest rate differential between China and the US. This year, CNY has depreciated relative to USD, but it has been driven mainly by the overall strength of the US dollar. If we refer to the renminbi index, the value of CNY against a trade-weighted currency basket has been relatively steady compared with the level at the beginning of the year. And compared to the euro and the yen, the renminbi has outperformed. So the depreciation has come mainly from the strength of the US dollar.

Whether investors choose to hedge in future should depend on their view of the dollar. Currently, we see the dollar continuing to strengthen, but it could peak in the future. In the event of a US recession, the USD could weaken from here as the first reaction. If US economic data starts to weaken and investors start to price in recession risk in the US, that could be the peak of the US dollar.

As multi-asset investors, we allocate capital across and within a whole series of asset classes including equities, fixed income, alternatives and cash. Our goal is to achieve a return profile that is positively correlated to risk assets, but with a smoother journey and less volatility.

We seek to achieve this by constructing portfolios with sufficient diversification. But this year has been difficult as an asset allocator and a dollar investor investing in China. Everything is down double digits, around 20-30% year-to-date in dollar terms; there has not been any diversification to be found.

That said, over the last six months, we have been positioning our portfolios opportunistically between return-generating assets, such as equity and credit, and diversifying assets, such as cash, government bonds and alternatives. Within return-seeking assets, we have been favoring equity over credit because of risk-return skews. There are idiosyncratic characteristics embedded in the Chinese credit markets that we have been wary of, including property developer bonds. The equity market as a whole appears to beis better positioned in the current environment to benefit from any pickup in sentiment or improved liquidity. And that is how we have been positioned in terms of asset mix at a high level.

Within equites, we had a preference for onshore equity versus offshore. Historically, the onshore market has been more responsive to stimulative measures in China, and the onshore market is generally more insulated from negative sentiment globally. Given the distinct investor base and its role as a performance driver to different equities markets, we are nimble to allocate between the two to profit from the divergence. In addition, we have been favoring Chinese government bonds, which has been one of the brighter spots. And we have kept the renminbi fully hedged, which has been a positive decision.