Is China getting too big to ignore?

Chinese New Year is ushering in the Year of the Ox. In Chinese culture, oxen are regarded as hardworking, trustworthy and patient. These are qualities that could prove invaluable for the Chinese authorities in 2021, having faced a wave of global mistrust over a perceived initial cover-up of the emergency of Covid-19.  

As the original epicentre of Covid-19, China was swift to implement an aggressive lockdown, but also it was the first major country to re-open. As a consequence, it was the only major economy to grow in 2020 – by 2.3%[1].

Escalating tensions: US VS China

While China’s reported infection rates are tiny – with fewer active Covid-19 cases claimed than Scotland – it is clearly not immune to the ongoing risks. Chinese New Year usually sees three billion trips taken as people leave the cities and return to rural villages to visit their families. However, this year workers have been urged to stay put.

From an investment perspective, sentiment towards China has been overshadowed in recent years by an escalation in US-China tensions. In particular, President Trump launched a trade war in 2018, slapping hefty tariffs on Chinese imports to address “unfair trade practices.”

While the change of US administration last month is certain to see a different style of diplomacy, a robust position towards China is set to remain. Indeed the new US Secretary of State, Anthony Blinken, told Senate confirmation hearings that Trump “was right in taking a tougher approach to China” and Janet Yellen, the new US Treasury Secretary, has not minced her words either. She has pledged to use the “full array of tools” to “take on China's abusive, unfair and illegal practices” and has accused China of "undercutting American companies by dumping products, erecting trade barriers and giving illegal subsidies to corporations," as well as "stealing intellectual property".

China's opportunities for investors

China has undoubtedly been a huge beneficiary of globalisation. In the two decades since it joined the World Trade Organisation in 2001, much of its growth has been driven by a combination of infrastructure investment, low-cost manufacturing and exports. It is easy to see why trade tensions might weigh on investors' minds.

However, the evidence shows that despite two years of trade war, China’s growth has not been stopped. It is on track to overtake the US as the world’s largest economy by 2028, five years earlier than previously expected as a result of the differing impact of Covid-19[2]. The International Monetary Fund are forecasting the Chinese economy will grow by 8.1% in 2021, compared to 4.3% across the advanced economies.

China’s economic priorities have also shifted away from exports and towards the domestic consumer. In this respect, China is too big an opportunity to ignore. The size of China’s middle class is conservatively numbered at 200 million but is expected to grow to 500 million by the end of the decade[3]. Consumption has already overtaken exports as the main driver of the Chinese economy, representing 54% of GDP last year[4], and it is estimated that China will eclipse the US as the world’s biggest consumer market by the middle of the next decade.

A new generation of entrepreneurs: potential and risks

Of course you don’t need to invest in China to benefit from Chinese growth. Many UK companies, such as Burberry, BHP and Unilever, generate significant revenues in China. But what investment in Chinese companies does offer is tapping into a new generation of entrepreneurs. According to the Global Unicorn Index – which measures start-ups valued at more than $1 billion – over 38% of unicorns globally are Chinese companies, narrowly behind the US. The emergence of significant Chinese giants on public markets, such as Tencent and Alibaba, is likely to be the start of a growing wave.

Chinese companies are, however, under-owned by investors compared to China’s size and vibrant new business creation. While US companies represent 57% of global equities, Chinese companies are less than a tenth of this at 5.5%[5] but clearly have the scope to become a much bigger presence over the coming decades.

Of course investing in China is not without risk. A long-term challenge relates to its demographic trends. Its population may be huge, but as a result of its disastrous former “one-child” birth controls, the workforce is set to shrink. Even though the policy was ditched in 2015, new births have continued to plummet, dropping 15% last year alone[6]. This risks China becoming too old before fully developing into a wealthy nation. 

On the immediate horizon, governance standards are weak and the Chinese markets are littered with State-owned enterprises where the priorities of the Communist Party will ultimately rank ahead of shareholders. However, with careful navigation, the Chinese markets clearly offer significant potential, especially when it comes to the growth of the Chinese consumer – arguably the one of the greatest investment opportunities of the next decade.

Examples of Bestinvest rated funds* with significant China exposure at the time of this piece according to fund fact sheets and/or Morningstar analysis include Aubrey Global Emerging Market Opportunities (55.8% exposure to Chinese companies), Fidelity Emerging Markets W (38.2% exposure to China) and FFSA Asia Focus (24.8% exposure to China).

Speak to us

If you have any questions about the markets, your investments, or anything else mentioned in this article, you can speak to our friendly telephone team by calling 020 7189 9999 or email best@bestinvest.co.uk.

* Our rated funds are those that we have the most conviction in. When rating funds, we track the performance of the fund manager rather than reviewing a fund’s historical returns. We also look at the people, processes and philosophy behind each fund.

[1] Source: International Monetary Fund, 1/21

[2] Source: Centre for Economics and Business Research, 12/20

[3] Source: Polar Capital, 2/21

[4] Source: National Bureau of Statistics, China 1/21

[5] Source: MSCI AC World Index

[6] Source: Ministry of Public Security, China