Underinvested in China? How to invest in the “New China” Economy

By Caroline Grimont

(Sponsor Content)

Investors are missing out on strong growth opportunities by being underinvested in China:  the world’s most populous country and second largest economy.

Since China slowed down from two decades of near double-digit growth, investors have become skeptical about investing in the country.

They worry about the country’s macro challenges; among them, a high leverage ratio resulting from a rapid buildup in debt over the past 10 years, excess capacity in industrial segments, an over-reliance on investment as a growth driver, and more recently, the risks of protectionism.[i]

In our view, these challenges are overstated. China has the capacity to overcome them and has taken a measured approach to sustain its growth, albeit at a slower pace.   The Chinese economy has grown almost ten-fold from US$ 1.2 trillion in 2000 to US$ 11.2 trillion in 2016, second in size only to the US.  Given the size of China’s economy now, a slower more sustainable rate of growth makes sense.

Our view is shared by Morgan Stanley, which states: “We expect China to avoid a financial shock and achieve high income status by 2027. Our view is that moving to higher value-added activities will propel the economy forward and drive the continued medium term outperformance of MSCI China versus MSCI EM, providing significant investment opportunities.”[ii]

China accounts for almost 50% of global economic growth

China remains one of the fastest growing economies in the world, with a forecasted growth rate of 6.5% in 2017 and 6% in 2018. On a global scale, China represents 15% of the world’s economy and accounts for close to 50% of global economic growth.

What investors need to recognize is that slower growth in China is a facet of deliberate government reform policies that aim to rebalance the economy towards sustainable domestically driven growth versus export-led growth.

We believe slower growth is positive for China; it is more sustainable and will facilitate a gradual shift from older fixed-asset sectors to new knowledge sectors such as technology, healthcare and education.

The Chinese government’s gradual reform and capacity rationalization in the “Old China” industries, traditionally dominated by State Owned Entities (“SOEs”), have led to the creation of the “New China” economy. These sectors will benefit from the ongoing rebalancing of the economy and secular drivers like an aging population and automation.

“China will complete its recent rapid emergence as a formidable competitor to traditional leaders in the high value-added manufacturing spaces in sectors such as telecom equipment, semiconductors, railways, power supply infrastructure and defence,” states Morgan Stanley.[iii]

Investors concerned about the rapid buildup in China’s debt should note that it has been funded by the country’s own savings and has been used to fund investment, not consumption. Therefore, the probability of an externally driven shock is very low.

Plus, China’s net asset positions – both at home and abroad – and large foreign, reserves provide adequate buffers against any financial shocks.

Evolution of a “New China” economy

We believe that stocks in specific sectors such as Healthcare, Education, Environmental Protection, Technology and Domestic Consumption will especially benefit from the evolution of the “New China” economy. These multi-year secular themes, in our opinion, have high growth potential and pricing power and are less correlated to GDP growth.

At the end of the day, China will only become stronger as the government stays its reform-oriented course. This means China will continue to offer a wealth of opportunities to make strong gains.

Investors can take advantage of these opportunities by investing in the Excel China Fund, which is managed on-the-ground by China Asset Management Company (AMC) Ltd., the country’s largest investment manager.

[i] Why we are bullish on China, Morgan Stanley Research, February 13, 2017.

[ii] ibid

[iii] ibid

Caroline Grimont is the SVP, Sales and Marketing at Excel Funds Management Inc. She has more than 23 years of domestic and international experience in marketing, sales and business development. Prior to joining Excel Funds, she was Head of Business Development with OANDA Corporation, one of the world’s leading foreign exchange trading platforms. She holds a Master’s degree from the National University of Singapore in International Economics and a Bachelor of Finance (first class honors), University College Dublin.Twitter: @c_grimont

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