Five Reasons To Invest In China

Since the lows of October last year, China equities have rallied strongly. The Shanghai A-share index is up 2.6% this year. This has primarily been driven by the government’s surprising easing of many strict zero-Covid policies in January. Given the consequent boost to the economy, the China rally may have further to run in 2023.

However, for long-term investors, it's important to gauge what the Chinese economic and investment landscape will look like many years from now. abrdn believes five major themes will shape China’s path to greater prosperity: aspiration, digital, green, health and wealth.

But before looking at each of these factors more closely, there are short-term reasons to be bullish about China.

Reopening to unleash consumption

The main near-term positive is the government’s easing of far-reaching Covid restrictions. This will have a strong positive impact by unleashing pent-up consumption demand for goods and services, which had been severely checked by movement restrictions. There will also be a normalization of local manufacturing production, which should ease both local and global supply-chain issues.

Economic outlook "opposite" to elsewhere

All this should boost China’s economic growth. abrdn’s Research Institute (aRI) recently hiked its 2023 economic growth forecast to 6% this year. Meanwhile, the absence of inflationary pressures in China should allow far more accommodative monetary policy than much of the rest of the world.

In marked contrast, weak conditions and rate-hiking are also prevailing in many other developed regions, including Europe. In sum, China’s growth/policy backdrop is in a sense "opposite" to much of the Western world, and undoubtedly supportive of Chinese corporate performance.

Cheap valuations compared to history and other markets

Relatively attractive equity valuations further underpin our confidence in China. Despite the recent rally, China equities’ forward price-earnings (P/E) of 12.8 is 15% lower than the 15-year average, while the price-to-book (P/B) ratio of 1.9 is 10% lower than the 15-year average. By comparison, for developed market (DM) equities, forward P/E of 15.6 and P/B of 2.8 are significantly higher than China, with the former broadly in line with DMs’ 15-year average, and the latter 29% above the 15-year average .

What are the risks?

On the Covid front, the possibility of reversion to mobility restrictions cannot be overruled. However, given rising natural immunity, and with the authorities noting mounting public disaffection last year, the likelihood of this seems low. On the geopolitical front, the risk of escalating tensions with Taiwan remains ever-present. However, periodic posturing aside, the likelihood of conflict remains low. Furthermore, Russia’s recent experience in Ukraine also reduces the risk of any serious misadventure.

Two of the more meaningful China-specific risks are ongoing trade tensions with the US and continued problems in the real estate sector. However, in our view, these risks should be manageable both from an overall China growth and policymaking perspective, and for active investors via portfolio positioning and construction.

Five powerful structural growth themes

Looking further ahead, abrdn believes five key themes will drive the Chinese economy over the coming decades.

Aspiration: rising wealth and a growing aspirational middle class will drive demand for premium goods and services over the coming decades.

Digital: increasing connectivity amid the widespread adoption of technology means a bright future for plays on cybersecurity, the cloud, software as a service, and smart homes.

Green: policymakers globally are committing to a greener and lower carbon world, and China is in the driver’s seat. Developments in renewable energy, batteries, electric vehicles, and related infrastructure offer great potential. Grid parity, when renewable energy is the same as existing power from the grid, could be game-changing.

Health: fast-increasing disposable incomes are driving demand for healthcare products and services. The opportunity set is diverse, from hospitals and medical equipment providers to research firms and drug & supplement producers.

Wealth: growing prosperity means structural growth for consumer finance, investment services, and insurance.