Investing in China – is it still a growth tiger?

It tends to be China’s uncomfortable geopolitical activities that grab the headlines. However, few can deny it has been a compelling place to invest in recent years, thanks to China’s strong economic development, a burgeoning stock market and exciting investment opportunities. China sits at the centre of the ‘Asian Tiger’ growth story, which may come to define the next decade.

China’s economic development and future outlook

China’s economic might has been building since it put itself on the global stage by joining the World Trade Organisation in 2001. However, the pandemic has been a key factor in China’s economic growth, taking its relative economic power to the next level. China was the only major economy to grow in 2020 and the IMF forecasts growth of 8.4% for 2021. It is now forecast to overtake the US as the world’s largest economy by 2028.

Dale Nicholls, manager of the Fidelity China Special Situations Trust commented at the start of 2021 that: "The economic backdrop for China remains supportive of the markets as the economy continues to recover. Strong control of the Covid-19 virus has clearly been a factor... Government stimulus has clearly been a factor supporting the recovery, but overall has been more restrained and targeted than measures seen in most western economies. This therefore leaves room for further policy support if required".

Of course, there are concerns: Joe Biden may be a different sort of US President to his predecessor, but his view on China is little altered. Chinese companies are unlikely to have the free pass into Western markets that has helped them grow to date. Geopolitical tensions will remain: the recent NATO summit made clear that Western allies still consider China their greatest threat. Even if there are no overt trade wars, the days of China apparently helping itself to Western intellectual property also appear to be over.

Chinese policymakers, however, recognise this. The most recent blueprint for China’s economic development laid out plans for greater self-sufficiency, particularly in critical industries such as semiconductors. President Xi Jinping has set out ideas based on “dual circulation”, creating a more self-reliant domestic economy by reshaping production to meet local demand, supplemented by external trade.

What does this mean for investing in China?

Over the five years to June 2021, the UK Investment Association’s China/Greater China sector was second only to Technology & Telecommunications for performance. In June 2021, the average fund was up 139%, compared to just 45% for the average UK All Companies fund. The main China stock market index, the Shanghai Composite Index, was up a less exciting 22.8% over the same period.

Much of this strong performance can be attributed to the hugely successful technology companies – Alibaba and Tencent – which have seen a similar trajectory to their Silicon Valley peers. These were not only the best China stocks in 2021 H1 but have been strong for a number of years. China has grown to become an increasingly large part of the MSCI Emerging Market Index (38% as at 31 May 2021 ), (link for compliance evidence MSCI Emerging Markets Index No follow) which has seen the Chinese market boosted by flows from those investing in passive, index tracking funds.

It’s not just about big technology. The China stock exchange is broadening all the time, with a fertile IPO market bringing new listings. The new Star Market (the Shanghai Stock Exchange Science and Technology Innovation Board, in full) – the Chinese equivalent of the Nasdaq – has been hugely successful, helping companies raise capital and diversifying opportunities for investors. Often these are in exciting new areas of technology.

For those looking to invest in China stocks the two main routes are via Hong Kong (‘H’ shares), which are widely accessible, or the domestic ‘A’ Shares stock market, which is only open to mainland Chinese citizens or qualified foreign institutional investors. In practice, if you invest through a fund, many active managers will hold a mix of both and may arbitrage between the two depending on valuations. However, there are specialist investments focused on each market individually.

The A Shares market, which trades in the renminbi (people’s currency), can be volatile. There is a lot of retail investor interest and this can mean the market is vulnerable to the caprices of investor sentiment, particularly in popular sectors such as technology. It’s a market that rewards active investment and judicious attention to valuations.

The China share market today brings opportunities, with some caution

On a long-term view, few can doubt the potential growth story for China. Valuations are undoubtedly higher than they were and investors need to exercise some caution but growth prospects remain strong and valuations still compare favourably to markets such as the US.

In spite of geopolitical tensions, the long-term outlook for many Chinese companies is sound: they have a vast domestic market, a rich seam of innovation and plenty of capital to support them. However, the withdrawal of pandemic-related stimulus packages and the ebb and flow of retail investors from the market may create short-term bumpiness for investing in China.

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