Figure 1: China’s economy bouncing back
Beijing’s abandonment of its strict zero-Covid policy at the turn of the year has significantly boosted the economy, while the government has also thrown its weight behind a raft of measures to boost growth. China’s Q1 GDP growth jumped 4.5% year-on-year1 amid robust growth in exports and infrastructure investment as well as a rebound in retail consumption and property prices. Many analysts forecast full-year growth of more than 6%. China’s growth rate may be slowing following years of breakneck expansion, but it is forecast to significantly outperform most developed markets in 2023.
Figure 2: Near record-low valuations
At the same time, the hangover from China’s heavy-handed handling of the Covid pandemic and volatility in the country’s property market means that Chinese equities continue to trade at discounts not seen for more than two decades.
Figure 3: Divergent monetary policies
In response to the Covid-19 pandemic in 2020, central banks across the developed world significantly eased monetary policy; this surge in liquidity caused sharp rises in consumer price inflation. In contrast, China moderated money supply growth and, in consequence, inflation is less of a concern. While the Fed embarked on a hiking cycle in 2022, China cut rates and its looser monetary policy is now set to provide a further boost to the economy.
Figure 4: Inflation below target leaving room for stimulus
Unlike most major economies, China is not grappling with high inflation and if anything is looking at disinflationary pressures, suggesting plenty of room for further monetary policy easing to boost demand. China’s annual inflation rate was 2% last year and the government has set a 3% target this year amid pledges to step up support for the economy as it recovers from Covid2.
Figure 5: Consumer spending in China on the rise
China’s economy – the second largest in the world – is in the midst of a transformation, from an investment-led to a consumption-led model, and this shift towards its vast domestic consumer market (population is 1.4 billion); and away from low-cost labour-intensive production towards advanced manufacturing and green tech is creating a wealth of unique and compelling investment opportunities.
Figure 6: Huge space for consumption and household wealth to grow
In 2022, China GDP hit US$17.8tn3, surpassing the entire 27-country European Union; yet China’s GDP per capita remains about 6x lower that of the United States4, highlighting the huge space for economic activity and household wealth to continue to grow.
Figure 7: China A share is world’s second-largest global equity market
China’s A share market – with approximately 7,500 stocks – is the second-largest global equity market by market cap and turnover. Its size and influence makes a standalone allocation very compelling for some investors. The market is highly sentiment- and momentum-driven – and dominated by retail investors – which can cause volatility and inefficiencies. These characteristics suit the value-led bottom-up contrarian investment style of the China Equity strategy.