Say goodbye to the dragon and hello to the snake. In the Chinese zodiac, the snake is associated with wisdom, charm, elegance, and transformation. Unfortunately, investing in China in the past few years has been like a game of snakes and ladders – with some very long snakes and some very short ladders!
A horrible mix of poor demographics, increased regulation, a collapsing property market, geopolitical concerns and a range of low quality companies – have led some to question whether China is in a long-term structural decline.
Every time a possible recovery has been mooted it has run out of steam. The hope is the announcements of policy change by the Chinese government in September last year – interest rate cuts, more liquidity for banks, additional property reforms as well as funding initiatives for the stock market – are more meaningful for a long-term recovery.
It is now something of a waiting game – details on the highly anticipated fiscal support won’t likely come until an annual parliamentary meeting in March – when there should also be more clarity on the tariff situation as Trump 2.0 kicks into gear.
Does the consumer buy into China’s own ‘American Dream’?
There are undoubtedly long-term challenges China has to tackle, at the heart of which is the move to a consumer-led economy – something it needs the consumer onside for. This brings me back to a conversation I had a few years ago with former Murray International manager Bruce Stout.
We discussed the first round of trade wars and his view was that the real reason behind them was the US being unable to accept there is going to be a decline in standard of living – because the unfunded liabilities on the sovereign balance sheet are huge (under-funded pension and healthcare liabilities).
These are what people bought into the American Dream for in the 1950s and 1960s – the ideal that the state would look after them at retirement age. Now they’ve got to retirement age to find out otherwise.
China is now having its own stab at the American Dream – when you’re moving to a consumption-led economy, households start to leverage. This may mean large levels of debt – something the consumer appears very resistant towards.
China has historically maintained a very high long-term savings rate, consistently ranking among the highest in the world, with household savings around 44%, and concerns about retirement and social savings rife.
Family bank balances have increased 80% from the start of 2020 (the start of the Covid-zero policy). The net increase in household bank accounts is equal to $9.2trn – greater than the GDP of Japan in 2023.
You can understand that caution. The collapse in the real estate market has been palpable for the consumer – the typical Chinese household has 60% of their assets in residential real estate.
Unemployment among the younger generation is rising and cost-cutting measures among this group are rife. I recently read that influencers are also sharing tips on turning financial discipline into a lifestyle. Posts on China’s own version of Instagram (Xiaohongshu) on how to save money total more than 1.5 million with more than 130 million views.
The government has introduced some initiatives to help tackle this. Pensions are a key factor in this, with retired urban salary workers earning $461 in retirement, while the less fortunate urban unsalaried and rural workers receive just $25. The government has introduced an increase in the retirement age from 60-63 for men and 55-58 for white-collar women (50-55 for blue collar) to tackle this burden.
China has already issued 81 billion yuan for this year’s trade-in programs. It covers more home appliances, electric cars and an up to 15% discount on smartphones priced at 6,000 yuan or less. It allows consumers with less money to shorten their upgrade cycle and encourage greater consumption.
The weakness in consumption matters more than ever because, with the exception of Covid, China is currently more reliant on exports to drive its economy than at any point since the 2000s.
While the US only accounts for 15% of China’s exports, it is still the single largest trading partner and more than 3x larger than the next largest export destination. Exports to the US account for approximately 4% of China’s GDP. If the US reduces demand for Chinese goods, it will hurt the economy.
But there are opportunities for investors
If the stimulus does prove more meaningful, there is no doubt China looks an attractive prospect. The forward price-to-earnings ratio of the Chinese market (as measured by the MSCI China) is just over 10x. That compares with over 18x for the MSCI All Country World index. Chinese equities are trading at a huge 55% discount to US equities.
The message from fund managers appears to be that there are selected opportunities, but with great caution needed.
JPMorgan China Growth & Income Trust manager Rebecca Jiang is looking for opportunities in the consumer discretionary sector, which she believes should benefit from increased household wealth due to stabilising housing prices.
“We are also increasing exposure to cyclical sectors like the electric vehicle (EV) battery space, where supply-and-demand dynamics are showing marginal improvement after a prolonged industry downturn,” she said.
Fidelity China Special Situations manager Dale Nicholls also believes the consumer sector offers some of the best ideas, such as e-commerce platform retailer PDD.
He also identifies innovation in the likes of technology – citing auto services provider Tuhu Car and freight services provider Full Track Alliance, both of which are using digital platforms to lower cost and improve services. Another area he sees good innovation in is industrials.
Clearly China is not without risk, but it does appear the policy pivot is a meaningful one and with prices as they are, China could offer an attractive entry point for medium to long-term investors.
Those looking for exposure to China beyond a pure China strategy – like FSSA All China or those mentioned above – might consider the likes of Invesco Global Emerging Markets or the FP Carmignac Emerging Markets fund.
Darius McDermott is managing director of FundCalibre. The views expressed above should not be taken as investment advice.