By Christopher Dhanraj, Head of iShares Investment Strategy at BlackRock.

Christopher Dhanraj, Head of ETF Investment Strategy, BlackRock.

For those celebrating the Lunar New Year, 2020 is the Year of the Rat, the first of the 12-year cycle of animals that name the years.

In Chinese mythology, a race was held to determine the rank of the twelve Chinese zodiacs. You might be wondering how could the tiny creature beat tigers and dragons to win the first-place honor?

Legend has it that the Rat tricked the Ox into giving him a ride in the race, and as they arrived at the finish line, the Rat jumped down and landed ahead of the Ox.

Coincidentally, 2020 marks both the start of a brand-new decade and a 12-year cycle in the lunar calendar. For investors, then, this could be a good time to look ahead to future trends that could shape China’s economy, and impact investors. These include:

1. Financial market reform

Under the US and China’s phase one trade deal signed in January, China has pledged to buy additional US goods and to improve protection of intellectual property rights. In addition, China is committed to opening up its domestic financial market by allowing more foreign capital access.

China announced last year that it would remove the quota limits on two cross-border investment schemes, Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor, allowing more foreign players to enter China’s asset management, pension management, and currency brokerage sectors.

After successful Chinese A-shares index inclusions, additional bond index inclusions, and the 11-point liberalization plan allowing foreign agencies to rate all bonds traded on local securities markets lead to growing foreign interest in Chinese fixed income markets this year.

For US investors, this could mean more choice and better access to the companies benefiting from China’s growth.

2. Urbanization

For decades, China has experienced a massive internal migration of people from rural areas to the cities. Nonetheless, the “Hukou system”, a household registration system designed to regulate population distribution, limited the ability of people to move freely to the cities. In late last year, however, China lifted residency curbs in smaller cities, as well as increasing infrastructure spending. By relaxing the Hukou rules, rural migrants should find moving to and settling down in nearby cities much easier.

This could have a profound impact on the Chinese economy in the long run. As urban populations not only tend to have a higher income level on average but also a higher consumption rate compared to rural residents, the increased urban population could boost consumption and revive slowing economic growth.

Source: BlackRock.

3. Technological innovation

While global markets celebrated the US and China’s agreement to sign a phase one trade deal, the tensions between the US and China on technology are likely to persist in the long run. At the same time, China’s technological advancement is continuing.

China has placed higher strategic priority on domestic technological research and innovation. In 2018, China accounted for nearly half of global patent filings with a record 1.39 million applications (see Figure 2).

While original scientific research in China still lags the US, China has proved itself more successful in business integration. For example, China rolled out the world’s largest 5G deployments with 130,000 base stations in 2019. Continued government support and the low cost, high skill workforce, could abet China’s competitive advantage in technology. That in turn could contribute to its economic growth in the next few years.

Source: BlackRock.

After a decade of robust economic growth, China is likely to face challenges, including economic slowdown in the next few years. However, these trends could help to bring some new opportunities for US investors. As China’s importance to the global economy continues to grow, it will be critical for investors to understand and monitor these developments in China.

Jasmine Fan, Investment Strategist at BlackRock contributed to this article.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)