The Chinese economy is growing. Attractive equity market for investors.
The Chinese economy has weathered the COVID-19 pandemic well. This means that the equity market there offers attractive prospects for foreign investors. An analysis of where opportunities and risks lie for investors.
COVID-19 pandemic is not putting the brakes on the Chinese economy
The performance of the economy and the equity market in China has been unrivaled worldwide this year. While other countries such as the US, Switzerland, and the UK have seen their economies shrink owing to the COVID-19 crisis, the Chinese economy is the only one in the world that will generate positive growth in 2020.
Dual circulation strategy saves the Chinese economy
China's successful response to recession in the wake of the lockdown can be attributed to the dual circulation strategy. This is based on two future economic drivers: first, the strategic promotion of key export markets (especially in Europe and Southeast Asia); second, boosting domestic demand through job security and strengthening the pension systems, as well as promoting key industries in a targeted manner. In these areas, Beijing supports national champions, but at the same time relies on the superior power of free competition.
This means that China's economic policy response to the COVID-19 crisis is almost the exact opposite of the responses in the US or Europe. Because, while developed countries have mainly compensated for job losses through fiscal top-up payments, China has successfully concentrated on the supply side – at notably lower cost.
Financial market liberalization lures foreign investors
The ongoing financial market reforms are an indicator of China's interest in a successful, open financial market – and that makes it attractive for foreign investors. At the same time, the Beijing government is systematically promoting the growth of the domestic capital market. This is no surprise, because private savings in China have increased twelvefold since the country joined the World Trade Organization (WTO), from the equivalent of approximately CHF 460 billion to CHF 5,700 billion at present.
Given the falling interest rates on savings, this capital is searching for investments. For that reason alone, there will be more IPOs in China in the coming years than in any other country. Therefore China's weight in the MSCI World index is likely to grow in the future. This represents an opportunity from which foreign investors should benefit through appropriate collective investments.
The Chinese economy is likely to keep growing strongly
In the medium term, returns of approximately 9% to 10% can be expected from Chinese equities, because the Chinese economy is likely to remain one of the fastest growing in the world. For the coming year, company analysts expect to see average earnings growth of 18.5%.
The moderate valuations, the high proportion of technology companies (50%), and China's structural growth markets such as 5G infrastructure and health would actually justify a valuation premium compared to other emerging markets. Added to this are China's large and far from saturated internal market and the process of transforming to a more sustainable, i.e. less export-based economy.
Foreign investors must take risks into account
Risks for investments in China are undeniable. Geopolitical tensions with the US have a negative impact. In hotspots such as Hong Kong, Taiwan, and the South China Sea, there is a risk of geopolitical misunderstandings and miscalculations with potentially serious consequences. Moreover, high bank loans are having an impact in China.
Although government debt is relatively low and there is plenty of room for maneuver in monetary policy, when the next crisis comes knocking at the door, it can be assumed that some of the private debt will be nationalized. But, in the end, the many opportunities that China offers continue to make the equity market very attractive.