A NEW MODEL
While the inclusion will raise the country’s profile, fund managers had already been touting the long-term investment case for the world’s second largest economy which accounts for a 17% chunk of global GDP, 11% of global trade and 9% of global consumption. As Mellor points out, the story for China is one of growth. “GDP may be slowing steadily from a high level but growth is likely to be stronger than most developed markets could hope to achieve,” he says.
“The driver is also shifting,” Mellor adds. “Capital investment has been the key driver of Chinese growth in recent decades but a move to a more consumer driven growth story raises some exciting possibilities and A-Shares offer the potential for more direct exposure to this theme.”
Wei Li, head of iShares EMEA investment strategy at Blackrock, adds that increasingly there is an acceptance that growth will not go back to the double digit growth of 2010. “The focus now is not on the level of growth but more importantly on the quality of that growth and to what extent it is driven by consumption. That approach has made investors much more comfortable with investing in China.”
China’s transformation into a consumer oriented from an investment and an export driven economy has been a long running theme but there is plenty of steam left. Figures from Morgan Stanley show that private consumption will almost double to $9.7trn by 2030, from $4.4trn in 2016 while per capita income is expected to grow to $12,900 by 2027, up from the current $8,100.
“China overall is the meeting of the old and new economies, but the changes are more structural change than cyclical whether it is the growth of consumption or the under penetration of services,” says Jennifer Wu, vice president and client portfolio manager within the JP Morgan Asset Management’s Emerging Markets and Asia Pacific Equities team. “Also, the supply side reforms have stabilised and removed excess capacity in old industries such as coal, steel and aluminium which will also offset any macro slowdown.”
Maarten-Jan Bakkum, senior strategist, emerging markets at NN Investment Partners, also highlights China’s efforts to reduce overcapacity and curb the rapid debt accumulation in its loss-making state-owned enterprises. Over the past five years, Beijing has tried to streamline and modernise its bloated and debt-ridden state-owned sector and create conglomerates capable of competing globally. The restructuring has involved reorganisations and mergers, reductions in excess capacity and the relocation of workers. While more work still needs to be done, Bakkum believes that “profitability in the state sector started to improve, which quickly reduced dependence on new debt. Capital outflows fell sharply, the pressure on the currency disappeared and confidence began to recover”.
In terms of opportunities, he puts internet and e-commerce top of the investment radar. “Chinese consumption growth has become one of the most exciting investment themes,” he adds. “This is particularly evident in the spectacular performance of the main internet and e-commerce shares. Growth prospects in this sector are certainly good, and perhaps they are not even fully discounted in current prices.”
