China flag and buildings

China: The Essentials

China’s rapid development is recognized as one of the most important shifts in the global economy

The country has experienced explosive growth over the last 25 years.

Source: World Bank (Oct 2019)

In brief

  • China’s rapid development is recognized as one of the most important shifts in the global economy. As the world’s second largest economy1, China is a major global player and is on a trajectory to rival the US.
  • China’s economic surge can be attributed to numerous factors such as large scale capital investment, drastic production growth and increased domestic consumption. However, annual economic growth has not always translated into comparable growth in domestic stock markets. This could change as the country opens up to foreign investment and lowers barriers to entry.
  • Despite the size and the growth of the market, China is currently under-owned as foreign investors hold just 3% of the broad market in China2. China will play an increasingly more important role in global markets, making it a potential source for portfolio returns and diversification.

1 Source: World Bank, April 2020. 2 Source: Wind, March 2020.

Investments in China are subject to certain additional risks, particularly regarding the ability to deal in equity securities in China due to issues relating to liquidity and the repatriation of capital. 

Political and regulatory frameworks may constrain investment choices. Investors will need to balance the investment case for gaining exposure to China with possible investment restrictions – and may need to consider indirect exposures to China.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

China’s Gross Domestic Product (GDP) Growth (US$)

China’s Gross Domestic Product (GDP) Growth.


Now the world’s second largest economy, China is a major global player – and is on a trajectory to rival the US.

Source: World Bank (July 2020)

Quotation start

With China’s real annual GDP growth averaging 9.5% through 2018, the World Bank describes the pace of growth as the fastest sustained expansion by a major economy in history.

Quotation end

Source: Congressional Research Service (Jun 2019)

China's economic surge can be attributed to numerous factors:

Capital investment
Large-scale capital investment
Growth chart icon
Drastic productivity growth
Consumption and price tags
Increased domestic consumption
Hand with coin

However, annual economic growth has not always translated into comparable growth in domestic stock markets.

In 2020, China started to lift some of the restrictions on foreign investments. This creates an entirely new investment opportunity – an opportunity that can no longer be ignored.

Globe with bull and capital

The China Investment Opportunity

China has the 2nd largest stock and bond markets globally (Source: Bloomberg, March 2020), which are increasingly open and included in global indices. With lowered barriers to entry presenting a vast market opportunity previously unavailable to foreign investors, investment processes still require deliberate views on China’s onshore markets.
Equity Market Capitalization

Equity Market Capitalization (US$)

China’s A-share market consists of over 3,500 companies, and has a combined market capitalization of over US$9 trillion, making it one of the largest equity markets in the world.

Source: Goldman Sachs, June 2020.

Relative size of bond markets

Relative Size of Bond Markets (US$)

Despite the size of the market, it is currently under-owned. Foreign investors hold just 3% of the broad market in China. Foreign Direct Investment (FDI)- Forward inward flow / FDI Stock 2016: US$133.7M / US$1.3B 2017: US$134.1M / US$1.4B 2018: US$139M / US$1.6B

 

Composition of China's GDP Growth (US$)

Composition of China's GDP Growth



Chinese consumers spent $4.7 trillion in 2017, up from $3.2 trillion in 20121. Therefore with consumer demand driving China’s economy – this sector is a significant area of focus for investors2.

1 Source: Financial Times, Feb 2019
2 Source: Knoema, Aug 2019

Quotation start

China’s consumer is going to be a key driver of global growth in coming years

Quotation end

Source: Ben Powell, BlackRock Investment Institute’s Chief Investment Strategist for Asia, July 2020
Structural reform priorities are driving investment opportunities. Some of these key reforms are: Capital reallocation, Income redistribution, Market regulation and Institutional framework
People passing through the Great Wall of China

Opening Up the Great Wall

China has shown great support for economic globalization, and is already making strides to open its markets to the rest of the world.
2002: Qualified Foreign Institutional Investor (QFII) scheme launches 2011: Renminbi Qualified Foreign Institutional Investor (RQFII) scheme launches 2014: Shanghai/Hong Kong Stock Connect launches 2016: Shenzhen/Hong Kong Stock Connect launches 2017: Bond Connect scheme launches 2018: MSCI 5% Inclu
Pagodas contrasted with modern skyscrapers

Old China vs. New China

China’s economic circumstances present a potentially compelling opportunity, but current investment processes must evolve in order for investors to tap into this market.
Old China: Export-driven, Commodities-focused, Closed economy, Working class, Shaped by agriculture New China: Technology and innovation driven, Consumption and service-focused, More open economy, Middle class, Shaped by urbanization

 

Not only is China now more open to investment, it is also the source of new business opportunities – driven by a growing middle class and domestic consumption.

Quotation start

China already has the world’s largest robot market and the government is actively promoting the robotics industry with tax reductions and special R&D funding.

Quotation end

Source: Victoria Mio, CIO Chinese Equities, Robeco (Feb 2019)

China will inevitably face unprecedented challenges as it proceeds to lead global economic growth.

However, China’s changing economy is creating a new landscape of opportunity for potential portfolio growth, and it may continue to do so for the coming years.

If foreign investors exclude China from their portfolio, they may risk missing out on the explosive potential of the vast market.