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Investors can no longer afford to ignore China – Outlining the Case for ‘Riding the Dragon’

May 14, 2020

BY Alexander Kalis
MANAGING PARTNER

China’s response to the coronavirus crisis will only speed its ascent to become the world’s largest economy, argues Hong Kong asset manager Value Partners in its newly published whitepaper, outlining the case for investing in the country.

Launched in collaboration with strategic advisory firm Oxford Metrica, Value Partners’ “Riding the Dragon” report includes a performance review highlighting China’s recent volatility and recovery, and goes on to dispel five ‘myths’ about the country, as well as examining the rapid increase in Chinese listings, and identifying likely future investment themes.

Oxford Metrica chairman, Dr Rory Knight says: “It has been predicted that by 2027 China will be the world’s largest economy. Every four years it is growing by an amount equal to the GDP of the UK – a new UK every four years! It is a nation bristling with opportunity where investing will at times feel like ‘Riding the Dragon’.”

China appears to be weathering the pandemic better other major economies. While Chinese stock prices slid by 10 per cent in the first quarter, in the same period, US markets lost 20 per cent. This means that US markets suffered a loss “equivalent to the whole of 2019 gains, whereas the Chinese markets lost little over two-months’ worth of their 2019 gains”. Capital inflows into Chinese stock markets have also boomed.

Responsible for this is the implementation of an “extremely broad set of counter-cyclical policies”. Value Partners details China’s policy response, which began with the government reducing rates for SMEs and agribusinesses, increasing bank loan quotas, cutting VAT, and waiving, reducing, and delaying tax payments for most businesses. It combined this with a massive industrial stimulation policy focused on sectors such as infrastructure and technology.

“Traditionally, but superficially, Chinese stocks have been seen as risky, opaque and inaccessible. But, again paradoxically, even as the rest of the planet remains convulsed by the grip of the Covid-19 pandemic, China may be seen as a safe haven by investors. China is set once more to take up its place as the workshop of the world, a key engine of global growth, the place where the bulk of supply chains meet,” reads the whitepaper.

The asset manager isn’t worried by slowing growth, either. It says that while China’s economic growth gradually slowed to single digits in the past decade, this is “to be expected” in an economy of its size. Future growth will turn on quality rather than quantity, such as improving the national standard of living, alleviating poverty, and strengthening industrial chains.

Dato’ Seri CHEAH Cheng Hye, co-chairman and co-chief investment officer at Value Partners Group, concludes: “In the next ten to fifteen years, despite the current setbacks, we believe China will continue its advance to become the world’s largest economy. The growth engines are changing. Whereas China used to be an export-driven economy, in recent years, its growth has been increasingly driven by domestic consumption. The policy response to the crisis will accelerate China’s current growth vector even more powerfully and rapidly.”

The whitepaper goes on to highlight five areas that present investment opportunities, starting with consumption, which now accounts for 54 per cent of GDP growth. It is expected to keep rising as 11 million more join the high-income bracket each year. Growth in consumption has overtaken industrial sector investment for the past five years running.

In addition, Value Partners expects pharmaceuticals and healthcare to grow alongside China’s rising over-65 population, while higher education is another area where the firm sees opportunities, given the current two million shortfall in places available at higher education institutes in China.

Furthermore, the explosion of online leisure and entertainment, as well as the 5G revolution, are both considered promising areas of investment.

Value Partners says that while investment returns and liquidity for foreign investors have historically been limited by China’s imposed market restrictions, the tide is turning. Chinese authorities recently abolished barriers such as the capital control systems for foreign exchange.

Since those reforms, notes Value Partners, an additional 400 institutional investors have invested in China’s financial markets. When the reforms are finalised, foreign investors will only have to register when they make investments in order to remit capital.

Value Partners’ managing director of European Business Hendrik von Ripperda-Cosyn says: “China A-share inclusion in the benchmark, combined with significant steps toward increased financial openness, present international investors with hitherto unattainable possibilities.

“Investors can no longer afford to ignore China.”

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