While last year China temporarily reverted back to its old economy model, this year it is refocusing on its new one, outlined in its new Five Year Plan. This is where the most interesting investing opportunities are found: domestic consumption, technological innovation and energy transition.
Global Market Strategist
Listen to On the Minds of Investors
In 2020, China engineered a V-shaped recovery from the pandemic, the only major economy to do so, with its real GDP level regaining its lost ground by the end of 2Q20. China’s expansion continues this year, but with a focus on the quality over quantity of growth. China aims to shift gears back to its long-term priorities by normalizing policy and growth drivers. The March economic data shows the baton moving back to the “new China” (domestic demand and consumption) from last year’s “old China” (external demand and investment). For investors, this is the most interesting long-term opportunity: China’s domestic consumption, technological innovation and energy transition. Crucially, these themes are more accessible as China’s capital markets continue to develop and open up. Independent of the business cycle, China is turning into a structural allocation on both sides of the 60/40 portfolio.
China’s GDP grew 2.3% in 2020, led by exports and industry. This recovery is very different than what has occurred in the U.S., where consumption has led and industry has lagged. The nature of the fiscal stimulus provided in each country helps to explain why: China aimed its support at local governments and corporations, while the U.S. aimed it directly at households. In 1Q, China’s GDP grew 18.3% year-over-year, showing the expansion continuing. However, an interesting shift has started occurring beneath the surface, evident in the March monthly data:
- Exports and industrial production remain strong, but have started moderating, down 7.4% and 3.9%, respectively, month-over-month seasonally adjusted.
- Policy normalization helps to explain this as credit growth (measured by total social financing) moderated to 12.3% year-over-year from 13.3% the previous month. This shift impacts real estate, infrastructure and public investment the most.
- A rebalancing is occurring as imports and retail sales gain strength, up 5.6% and 3.2%, respectively, over the previous month.
- After a delay, domestic demand is now rebounding as employment and wages pick up and confidence builds. Going forward, it will be key to monitor retail sales in order to gauge whether China is successfully engineering a soft landing.
While last year China temporarily reverted back to its old economy model, this year it is refocusing on its new one, outlined in its new Five Year Plan. This is where the most interesting investing opportunities are found: domestic consumption, technological innovation and energy transition. Within equities, these themes especially benefit the consumer discretionary, technology and health care sectors. After this year’s 18% correction in the MSCI China, valuations are now presenting a more interesting entry point. Over the next decade, China’s growing capital markets and its increasing size in the 60/40 portfolio is the most interesting development to watch.
Timing and nature of Chinese recovery different than U.S.
Dec. 2019 = 100