China – crisis what crisis.? Dina Tina, head of Global Index Portfolio Management at Franklin Templeton, steps back to take a good hard look at investing in China.
China’s stock market has certainly been battered, rattling both consumer and investor confidence. But we wouldn’t be so quick to categorise this disappointing stage as a crisis.
Investors should still tread cautiously, of course, given that Chinese consumers remain nervous about a still-shaky property market and high youth unemployment. But rather than completely writing off the growth potential of China’s domestic market—one arguably too big to ignore—here are some points to consider.
- The constructive summit between Presidents Joe Biden and Xi Jinping in California last year achieved some semblance of comfort over geopolitical tensions. And Xi’s recent meeting in Beijing with US business executives, like Apple CEO Tim Cook, over topics as artificial intelligence (AI) could bode well for stabilising relations.
- We’ve been encouraged by China’s private investment in AI, which is second only to the US. China has also made impressive progress with industrial robot installations, which have now outpaced those of the rest of the world combined[1]. And its innovators comprise nearly half of all global patent applications filed—greater than that of the US, Japan, South Korea or Germany.
- This Lunar New Year holiday saw an uptick in both China’s domestic travel and tourism spending, which rose 47% from 2023.
- Among the recent measures China has taken to stabilise its market and restore investor confidence is a tightening of the rules related to short selling in the market.
We are already beginning to see encouraging coordination between China’s fiscal and monetary policy changes. Following on earlier central bank moves at the start of this year that lowered the reserve requirement ratio (RRR) for financial institutions, regulators in March noted “ample” room for further cuts, which may enable substantial liquidity to be injected into the economy. And this year, Beijing is expected to provide at least US$137 billion in low-cost financing to help public housing programmes.
China’s remarkable development over the last few decades gave birth to a middle-class population of 500 million people who have now tasted prosperity. From 2017 to 2021, its luxury market tripled in size and should be supported going forward by another projected 80 million middle-income earners to join the ranks by the end of this decade. But this extraordinary pace of economic growth was always bound to hit some speed bumps and it’s important to remember that China is still undergoing a major transition from export-led growth to a more sustainable model that is increasingly driven by consumption and services.
China’s passenger vehicle exports, and particularly its electric vehicle sales, are other key areas of progress to watch. Last year, China nearly surpassed Japan as the world’s largest car exporter and in January, domestic retail passenger car sales were also up 57% year-over-year. China has been the envy and fear of global electric-vehicle manufacturers. With great government support, Chinese upstart automakers have eclipsed foreign rivals to develop electric cars faster and develop new smart tech features.
Partly because of China’s increasing demographic troubles, there’s been much fanfare over whether India is the “next China.” India’s more youthful population switched places with China in April 2023 to also become the world’s biggest nation. In September last year, India’s manufacturing and services PMI – already long in expansion mode – saw its services sector strengthen to a 13-year high, indicating a substantial rise in new business orders and improving business confidence. Notable technological and infrastructural developments were also achieved last year.
However, we should also keep in mind that India is quite a different economy than China with its own distinct merits and challenges. Unlike China, India is a noisy democracy with still-high barriers to trade. In 2022, India had one of the highest import duties globally, according to the World Trade Organisation.
So, perhaps, China really is the only next China. While investors do not expect a swift rebound in China’s market, some are seeing alluringly cheap valuations as an attractive entry point to the world’s second-largest economy. As of the end of March, the FTSE China RIC Capped Index was trading at a price-to-earnings (P/E) ratio of just 9.53x and price-to-book ratio of 1x.
Further afield, China has endeavoured in recent years to increase its influence in Latin America. Trade agreements, foreign direct investment and loans have played an important role in strengthening ties with the region. The reaches of China’s global influence with its ambitious Belt and Road Initiative should also not be overlooked as it seeks to develop new trade linkages, cultivate export markets, boost Chinese incomes and export its excess productive capacity. Chinese investment towards a vast modern container port in Peru – expected to commence operation by early 2025 – stands to transform South American trade and supply lines going forward.
[1] The AI Index 2023 Annual Report by Stanford University
