Updates to the JPMorgan China Growth & Income plc portfolio reflect China’s evolving economy
The growth and changing drivers of China’s economy are playing out in a dynamic global macroeconomic environment. Investors, including the JPMorgan China Growth & Income plc (JCGI) portfolio managers, have been navigating the impacts of supply chain disruptions, inflation and now, the threat of trade tariffs.
Importance of the property market
China’s economy has become much more dependent on Chinese consumers and how they are feeling about their wealth and economic prospects. Falling house prices are having a huge impact on Chinese consumers because, on average, roughly 50% of their wealth is tied up in property—almost twice as much as US consumers.1
The Chinese government has acknowledged that the current economic weakness is on the demand side—consumer wealth and consumer confidence—and that the property market is key to fixing the issue. While past stimulus efforts have sometimes had conflicting goals, the People’s Bank of China (PBoC), the Ministry of Housing and local governments are working better together this time. In terms of real estate policy, the government is planning to build more social housing by using local government bonds to purchase unsold houses and idle land. Policymakers have also removed home purchase restrictions in Tier 1 cities and reduced the interest rate on outstanding mortgages.
Addressing consumer confidence and wealth
Chinese consumers’ confidence and wealth extends beyond the property market. Chinese households, on average, have 25% of their assets in deposits and 20% in financial assets vs. 8% and 42%, respectively, for US households.2 With deposit rates and equity markets declining in recent years—in addition to property prices falling—many Chinese consumers feel less wealthy and have curtailed spending.
Therefore, policymakers are also trying do more to stimulate consumption and support the equity market. The central government has relatively quickly and effectively rolled out a program directly to consumers that subsidises home appliances and autos. Rather than massive broad stimulus, other policies are likely to target specific groups, such as rural households and families with newborn children or disadvantaged groups.
The PBoC is also seeking to promote private enterprise and support the equity market. The central bank launched a CNY 500 billion asset swap facility for non-bank financial institutions to buy equity shares and a CNY 300 billion liquidity for company share buybacks.3 The PBoC is also considering setting up an equity market stabilisation fund.
Could “made by China”—not in China—mitigate tariffs?
The impact of potential US tariffs on the Chinese economy and equity market are challenging to estimate. However, the JCGI portfolio managers consider some broader trends when looking at Chinese companies’ exposure.
Beginning with the threat of tariffs during the first Trump administration and continuing through the Covid pandemic, many Chinese companies have been preparing for increasing trade barriers by moving production closer to their clients and seeking new markets. For example, Chinese manufacturers of solar panels, power equipment and automation have successfully expanded into Latin America and Africa, where their businesses have higher margins and have gained market share. Some Chinese textile and consumer electronics companies suggest they will be able to supply roughly half of their US-based revenues from factories in Southeast Asia and can supply all of their US-based revenues from factories outside of China.
From an equity perspective, low valuations for the overall Chinese equity market may already reflect some of the tariff risk.
Looking ahead
JCGI’s portfolio managers have been taking steps to prepare for China’s changing economy and equity market. In an effort to mitigate the downside participation, the portfolio managers are increasingly looking for companies with stable growth and reasonable valuations. Recently they have added some utilities, which have defensive growth characteristics, while reducing exposure to some highly valued stocks that look vulnerable, such as software companies that may see profits fall as customers reduce spending.
This modest repositioning has resulted in a higher dividend yield for the portfolio, which provides a more stable source of returns in uncertain times, but the overall characteristics of the portfolio have not meaningfully changed. The portfolio continues to have a higher return on equity and lower (negative) net debt-to-equity ratio than the benchmark. JCGI is currently overweight the information technology, industrial and healthcare sectors and less exposed to financials, especially banks, and energy stocks. JCGI also continues to have more exposure to small caps compared to the benchmark and the team is adding resources to support research and investment efforts, particularly in smaller companies.
While the last few years have been challenging, the portfolio managers sense a renewed optimism, particularly from within China. A notable improvement in local investor sentiment that began in October could set the stage for a different Chinese equity market in 2025.