Devotees of cult television may distantly recall ‘Monkey’, which many years ago found an unlikely home in the BBC’s teatime schedules. It told the story of Sun Wukong, also known as the Monkey King, a colourful figure in China’s literary, religious and cultural history.
To Western audiences, not least in light of its atrocious dubbing and arcane plots, ‘Monkey’ was essentially incomprehensible. It was riotously entertaining in its own unique way, but actually trying to make sense of what was happening was a waste of time and energy.
China’s investment landscape might seem similarly bewildering today. Against a backdrop of mounting international tensions – most starkly evidenced by renewed trade conflict with the US – the appeal of the world’s second-largest economy is perhaps less than crystal clear.
There is a school of thought that China has been uninvestable for some time. Amid the fallout from the Trump administration’s Liberation Day and earlier assertions that Beijing is ready to fight “a tariff war… or any other type of war”, (as the Chinese Embassy in the US said in a post on X in March) it is easy to see why such a view might hold sway today.
Move beyond the doom-and-gloom headlines, though, a rather different picture may emerge.
Here are five reasons why China could still be worthy of investors’ attention and why in this case, unlike with ‘Monkey’, it could pay to understand what is actually going on.
The transition from imitator to innovator
Traditionally, China has been thought of as a ‘fast follower’. The vast majority of its companies have favoured replication and incremental improvement over genuinely ground-breaking innovation.
This model appeared firmly entrenched barely five years ago, when the government cracked down on private enterprise in general and technology companies in particular. Yet the policymaking stance is now determinedly pro-growth, with new stimulus measures unveiled at regular intervals and once-ostracised entrepreneurs back in the fold.
Increasingly, the message from Beijing is that businesses must strive to gain a foothold at the cutting edge and will not be penalised for succeeding. Precision tool manufacturer Precision Tsugami, which recently announced a number of orders related to artificial intelligence and robotics, is a good example of how smaller companies are benefiting from this significant shift in tone.
Continued progress on ESG
Led by the new US administration, a growing number of Western corporations are rowing back on their environmental, social and governance (ESG) commitments. By contrast, China has been stepping up its efforts to become an ESG leader.
There is obviously still some way to go in terms of the S of ESG, but progress on E and G issues has been considerable – including an ambitious emissions-trading scheme, undisputed dominance in sales of electric vehicles (EVs) and the formulation of a first set of basic standards for corporate ESG disclosure.
More simplistically, if one measures governance by a commitment to shareholder returns, most Chinese corporates have been disciplined in paying out dividends and stepping up share buybacks, despite a difficult economic backdrop.
The positive direction of travel is hard to deny. In tandem, it is worth remembering that goals prioritised by the Chinese government are often met more rapidly than widely thought possible. CATL, which launched only 14 years ago and is now the world’s number-one maker of batteries for EVs and energy storage, is a poster child for what can be achieved.
Depth of integration in the global economy
There is, of course, a political angle to the US’s imposition of swingeing trade tariffs on Chinese goods. But the key objective – one now supported by Republicans and Democrats alike – is to halt China’s economic rise.
Investors could be forgiven for supposing China might eventually become ‘another Russia’ – that is, a country crippled by Western sanctions and other measures. The fear is that this scenario would be notably likely if Beijing were to take military action against Taiwan.
Yet the reality is that China is already deeply entwined in the global economy. Even allowing for greater Western onshoring and/or relocation, this integration would be difficult to reverse.
For instance, an overwhelming proportion of Apple products are still assembled in China. It certainly would not be in China’s self-interest to decouple from its export markets – and it would prove highly destabilising for Western economies to pursue that goal, too.
The forces of deglobalisation and localisation
Notwithstanding the above, with the US vigorously pushing its ‘America first’ agenda and populism and nationalism on the rise elsewhere in the West, the march of deglobalisation looks set to continue. What is interesting is that this may not be bad news for several Chinese businesses, which have been reducing their own reliance on foreign goods and/or are benefiting from consumers’ preference for local brands.
Take cosmetics company Proya, which was last year named one of the fastest-growing businesses in its province after posting year-on-year growth of almost 38% in 2023. The company is steadily claiming domestic market share from Western rivals such as L’Oréal and Estée Lauder, which are notably more expensive.
Kingdee, a producer of ERP (enterprise resource planning) software, is another winner in this respect. With Beijing urging Chinese companies not to use Western ERP providers such as SAP, it is broadening its offering to meet the needs of businesses of all sizes.
Pent-up demand
There are many reasons why China’s working-age population of around 900 million is so reluctant to spend. The lingering impacts of the Covid-19 pandemic, a prolonged real estate crisis and a weak social safety net are arguably foremost among them.
Consequently, one of the biggest challenges China faces is to reinvigorate consumption in a nation where household spending has always been low relative to that of most developed countries. Sparking domestic demand is regarded as vital to unleashing a new era of growth.
Some estimates suggest the net increase in China’s household bank accounts since the onset of the pandemic equates to $9.8trn – more than double Japan’s 2023 GDP. So Chinese consumers could unleash an unprecedented wave of spending if and when the desired transformation does occur – and the opportunity set for investors, especially among smaller companies, is likely to expand even further.
Gabriel Sacks is an investment director on Aberdeen’s global emerging markets equities team. The views expressed above should not be taken as investment advice.