As we approach the Chinese new year there remains much talk and press coverage about China – the ongoing trade war with the US, slowing growth and the country’s huge debt burden. 
Indeed, enough has been written about the US-China trade war and the potential consequences to fill a small library. For now though at least, the tone has softened and diplomacy seems to be making a reappearance in the rhetoric from both sides.
This year is the Year of the Pig and if both sides can adopt some of the animal’s supposed positive characteristics (loyalty, honesty, positivity) then a plan to navigate the choppy waters may be found. However, worries about China belie a country which remains full of opportunities and arguably the region offers one of the best growth prospects over the next few decades.
It is true that Chinese GDP growth has been slowing, but this is inevitable as the economy matures and shifts from being manufacturing and infrastructure driven to consumption led.
This shift can be clearly observed from the data over the last five years, which shows that growth in consumption has gone from less than 40 per cent to circa 75 per cent of GDP growth.
Although in nominal terms consumer spending did slow over the last quarter, if one excludes auto sales that is, where tax cuts brought forward new car purchases, this slowdown is not significant.
Additionally, the falls seen in the China A-Share market last year are not expected to impact consumer spending habits over the coming period.
In fact, unlike in developed economies, falling stock markets in the country and the associated wealth effect, do not seem to have a direct impact on consumer spending habits. This is largely based on the fact that listed companies are not widely held amongst the populace.
The Chinese government took steps last year to address some of the issues with debt creation, particularly those within the shadow banking system. This led to some short-term pain for many private companies that had been big recipients of this form of credit. However, over the longer term, the clampdown should improve the health of the Chinese financial system and funnel loans through more transparent channels.
There clearly remain risks to investing in China, and we are by no means advocating that investing in the region will be a smooth ride; far from it. But, for the more adventurous investor, with a longer-term time horizon, we believe it offers excellent growth prospects and therefore can play a role within a diversified portfolio. For those willing to look beyond short-term market volatility, we would highlight two funds which we believe are worthy of consideration.
First State Greater China Growth
The fund is focused on providing capital accumulation and will primarily invest in large- and medium-sized companies that are based in, or have significant operations in China, Hong Kong or Taiwan. The lead manager of this fund is Martin Lau, who is a senior member of the First State Stewart Asia team with over 20 years of experience managing Asia Pacific and China equity funds.
We see this fund, which places an overriding emphasis on selecting higher quality companies, as a very strong option for long-term investors who wish to access the greater China region, but in a more conservative manner.
Matthews Asia China Smaller Companies
This fund is focused on long-term capital accumulation through a portfolio of higher growth, high quality, smaller-sized companies in China and associated markets, such as Hong Kong and Taiwan.
This fund seeks to take advantage of China's growing shift towards a more consumer-driven economy by targeting the most innovative and entrepreneurial companies, typically located in emerging industries such as automation, healthcare, and e-commerce.
Smaller companies in China have often needed to be more competitive and efficient with their capital than their larger peers, as they have tended to have less capital to start with, and this discipline has put many on a firm footing.
Alex Farlow is head of risk-based solutions research at Square Mile Investment Consulting & Research. The views expressed above are his own and should not be taken as investment advice.