• RankiaPro Europe
    • RankiaPro Spain
    • RankiaPro LATAM
    • RankiaPro Italy
SUBSCRIBE
Search
Close
  • Home
  • Insights
    EQUITIES
    EQUITIES
    FIXED INCOME
    FIXED INCOME
    ESG
    ESG
    INTERVIEWS
    INTERVIEWS
    MARKET OUTLOOK
    MARKET OUTLOOK
    ETF
    ETF

    Featured

    Cover-Silicon-Valley-Bank-bankruptcy
    Insights

    Silicon Valley Bank bankruptcy: the market reactions

  • News
    APPOINTMENTS
    APPOINTMENTS
    LAUNCHES
    LAUNCHES
    ASSET MANAGERS
    ASSET MANAGERS

    FEATURED

    cover-naim-abou-jaoude-ceo-candriam
    Asset Managers

    Candriam to acquire majority shareholding in Tristan Capital Partners: a leading european real estate manager

  • Magazine
  • Events
    RANKIA FUNDS EXPERIENCE
    EVENTS & CONFERENCE CALLS
    EVENTS & CONFERENCE CALLS
    RANKIAPRO MEETINGS
    RANKIAPRO MEETINGS
  • Podcast
  • MiFIDII Training
Menu
  • Home
  • Insights
    EQUITIES
    EQUITIES
    FIXED INCOME
    FIXED INCOME
    ESG
    ESG
    INTERVIEWS
    INTERVIEWS
    MARKET OUTLOOK
    MARKET OUTLOOK
    ETF
    ETF

    Featured

    Cover-Silicon-Valley-Bank-bankruptcy
    Insights

    Silicon Valley Bank bankruptcy: the market reactions

  • News
    APPOINTMENTS
    APPOINTMENTS
    LAUNCHES
    LAUNCHES
    ASSET MANAGERS
    ASSET MANAGERS

    FEATURED

    cover-naim-abou-jaoude-ceo-candriam
    Asset Managers

    Candriam to acquire majority shareholding in Tristan Capital Partners: a leading european real estate manager

  • Magazine
  • Events
    RANKIA FUNDS EXPERIENCE
    EVENTS & CONFERENCE CALLS
    EVENTS & CONFERENCE CALLS
    RANKIAPRO MEETINGS
    RANKIAPRO MEETINGS
  • Podcast
  • MiFIDII Training
Search
Close
Search
Close

Home | Beyond reopening: China’s transformation

Beyond reopening: China’s transformation

Reopening and cheap valuations are just a few of the reasons investors should be looking at China next year.
RankiaPro Europe

2023/01/03

By James Cook, Head of Investment Specialists, Federated Hermes Limited

Emerging markets have lagged developed markets this year by 6%, with China reflecting the most notable drag at -26%. However, China stocks are enjoying something of a ‘Santa rally’ amid hope Beijing would relax its strict Covid-19 measures and fully reopen its economy.

The MSCI China Index jumped by 29% in November to deliver its best monthly return since 2009, shown in figure 1 below; a ‘perceived U-turn’ in the country’s draconian Covid policies drove the market. While markets were initially volatile following the 20th Party Congress last November, which saw President Xi Jinping reinstated for an unprecedented third term, the Beijing government has since made clear moves to better support the economy.

Figure 1: MSCI EM ex-China Index and China relative, year-to-date

Reopening and stabilization of the property sector are key near-term drivers

We have seen constructive policy changes on multiple fronts that generally anticipated that the country was preparing for a more significant reopening.

Investor sentiment has also been boosted by recent measures announced to support China’s ailing property sector. A 16-point rescue plan was jointly issued by the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC), directed at supporting financing for developers. Last month’s meeting between US President Joe Biden and Xi Jinping also bolstered hope that better cooperation between the two countries could reduce the risk of delisting of hundreds of Chinese companies from the US.

Despite this, investors have had many reasons to sell China. The risk-reward for Chinese equities looks attractive, with the region down 15% relative on the year, as shown in figure 2 below, despite its recent rebound.

Figure 2: MSCI China Index 12-month relative to MSCI World Index

Corporate decoupling

While reopening and cheap valuations are important for market sentiment, most corporates are cautious about expansion plans. The focus seems to be on managing costs and enhancing profitability. With the Communist Party policy favouring state-owned enterprises (SOEs), private companies are likely to be less aggressive on growth even when the environment normalises. It will be crucial to see how the Chinese economy performs beyond the reopening event, as a lack of meaningful private sector investment will hurt the economy over the medium to long term.

Transforming China

China is at a crucial junction with multiple challenges including geopolitical rivalry with the US, outbreaks of Covid and stress in the property sector to name a few. These are immensely challenging issues that will test the resolve of the Chinese leadership. In any case, the debt-fuelled growth model of the past is irrelevant now and historical valuation less meaningful. We are focused on how China is likely to evolve beyond the post-Covid re-opening trade. We believe that China at best can achieve a mid to low single digit real GDP growth considering the constraints under which the economy is operating.

Despite these challenges, underneath the surface, the Chinese economy is undergoing a deeper transformation that is exciting and presents unique investment opportunities for long-term investors. We believe focusing on the following themes will offer a long runway for growth in an economy that is largely ex-growth:

  • Digitisation
  • Renewable technologies and energy
  • Biotechnology
  • Financialisaton of savings
  • Metaverse
  • Localisation of critical technologies

Figure 3: Despite geopolitics and policy shifts, the Chinese economy will continue to transform

While the opportunity in these sectors is likely to be meaningful, it is important for investors to avoid pitfalls, some which are unique to China. This includes any sectors that can be associated with geopolitics, such as the US entity list. In addition, we are avoiding companies in cyclical industries as these are typically loaded with excessive leverage and generate returns below their cost of capital.  Over time, we believe that such companies will likely find the transition to net zero very challenging.

While China has made commendable progress in multiple fields, there is potential for the economy to achieve more. However, progress in the future will depend on the pace of economic reforms and further opening of the economy. This will heavily depend on how quickly the Chinese leadership is able to reform its state-owned enterprises (SOE’s), making them competitive and relevant for the future.

Globally, economies rarely cross the USD 10,000 per capita income without reforms at an institutional level. China has already crossed this level thanks to its previous growth model, focus on exports, and infrastructure. As some of these drivers unwind, including property and excessive leverage, China will have to quickly assemble new drivers to sustain income levels and ensure a higher quality of life for its people.

  • China, China Economy, covid-19, USA

Related Post

COVER-China-Fidelity

Fidelity International obtains licence to operate mutual fund business in China

COVER-Reyes-magos

Dear Investor, what are you going to ask the Three Wise Men?

Cover-Global-ETF-RankiaPro

Global ETF gained €62.3bn in January

NEWSLETTER
If you want to keep up to date with the latest news from the asset management industry and all our events, subscribe now to our newsletter.
Subscribe

Last Tweets

9h

🌤 The crucial role of resources in the energy transition debate

🔗#EnergyTransition #Resources #RankiaProEurope
...https://rankiapro.com/en/crucial-role-resources-energy-transition-debate/

10h

🗣️Change to @Amundi_ENG corporate governance

🔗 #Appoinment #Change #RankiaProEurope
...https://rankiapro.com/en/change-to-amundis-corporate-governance/

13h

🎙We introduce you to the new #AdvisoroftheMonth
João Martins, Senior Private Banker at ABANCA Portugal.
Don't miss
... his interview!

🔗#ProfessionaloftheMonth #RankiaProEurope
https://rankiapro.com/en/joao-martins-abanca-portugal-our-advisor-month/

14 Mar

🗣️ @Robeco launches Sustainable Senior Loan Fund

🔗#PrivateDebt #Sustainability #RankiaProEurope
...https://rankiapro.com/en/robeco-launches-sustainable-senior-loan-fund/

RankiaPro

  • Home
  • Insights
  • News
  • Magazine
  • Events
  • About us
Menu
  • Home
  • Insights
  • News
  • Magazine
  • Events
  • About us

Terms and uses

  • Cookies Policy
  • Privacy Policy
  • Disclaimer
Menu
  • Cookies Policy
  • Privacy Policy
  • Disclaimer

Contact

  • [email protected]
  • (+34) 963 386 976
  • (+34) 640 308 023

Newsletter

If you want to keep up to date with the latest news from the asset management industry and all our events, subscribe now.

Subscribe

All rights reserved © 2003 – 2023 Rankia S.L.

RankiaPro

  • Home
  • Insights
  • News
  • Magazine
  • Events
  • About us
Menu
  • Home
  • Insights
  • News
  • Magazine
  • Events
  • About us

Terms and uses

  • Cookies Policy
  • Privacy Policy
  • Disclaimer
Menu
  • Cookies Policy
  • Privacy Policy
  • Disclaimer

Contact

  • Email: [email protected]
  • Phone: 963 386 976 – 601 302 692

All rights reserved © 2003 – 2023 Rankia S.L.

Manage Cookie Consent
To provide you the best experience on our website, we use technologies like our own and third-party cookies for analytical purposes and to store device information. Consenting to these technologies will allow us to process data such as browsing behaviour or unique identifiers on this site. Not consenting or withdrawing consent may adversely affect certain features and functions.

To learn more, please read our Cookie Policy and Privacy Statement.
Functionality or Personalisation Cookies Always active
These cookies are necessary for the website to function or for the unique purpose of transmitting a communication over an electronic communications network, and cannot be disabled on our systems. Usually they are set up to respond to actions made by you to receive services, such as adjusting your privacy preferences or filling out forms. You can set your browser to block or alert you to the presence of these cookies, but some parts of the website will not work. These cookies allow the website to provide better functionality and personalisation. They may be set by us or by third parties whose services we have added to our pages. If you do not allow these cookies some of our services will not work properly.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics Cookies
These cookies allow us to count traffic sources in order to measure and improve the performance of our website. Storage or technical access which is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing Cookies
These cookies may be site-wide, placed by our advertising partners. These third parties may use them to create a profile of your interests and show you relevant adverts on other sites. If you do not allow these cookies, you may receive less targeted advertising.
Manage options Manage services Manage vendors Read more about these purposes
Cookie Settings
{title} {title} {title}
  • RankiaPro Europe
    • RankiaPro Spain
    • RankiaPro LATAM
    • RankiaPro Italy
Menu
  • Home
  • Insights
    • Equities
    • ESG
    • ETF
    • Fixed Income
    • Interviews
    • Market Outlook
  • News
    • Appointments
    • Asset Managers
    • Launches
  • Magazine
  • Events
    • Events & Conference calls
    • Rankia Funds Experience
    • RankiaPro Meetings
  • Podcast
  • MIFIDII Training

Follow us on social media

Linkedin Twitter Youtube Flickr

NEWSLETTER

Subscribe

Book now

Beyond reopening: China’s transformation