Investing into China

With stock market valuations reaching all time highs as the world battles a pandemic that has no end in sight, the disconnect to fundamentals has reached an uncomfortable level. The sensible move in any period of uncertainty is always to bet on fundamentals. It makes sense for investors to have exposure to China in their portfolios.

Positive data supports recovery picture

Economic data out of China in recent months supports this picture of recovery. Manufacturing and Service PMIs have come in above 50 and industrial output gained 5.6% in August, all rising for the fourth straight month and returning to pre-covid levels. Chinese retail sales grew by 0.5% in August 2020, the first month of increase since 2019. On all fronts, the economic backdrop is improving.

Chinese Government remains supportive of the economy

China’s decisive and concerted fiscal and monetary stimulus efforts have also acted as an effective backstop to an economic decline. It has propped up its financial sector to ensure credit conditions remain supportive of businesses: the medium-term lending facility (MLF) rate was cut by 20 basis points to 2.95% injecting US$7.9 billion into the banking system. The PBOC has asked banks to sacrifice USD$212 billion in profits in 2020 to finance affordable loans to companies. The State Council authorised a further US$140 billion in local government special purpose bonds to spur infrastructure investments. Other targeted measures include VAT exemptions, loan subsidies, lowered electricity prices, and spending vouchers for its citizens.

The takeaway here is that China remains ready to act to support the economy. With sizable foreign reserves and interest rates well above 0, China still has many levers to pull in its economic toolkit to jumpstart its economy compared to the US and Europe.

First to produce coronavirus Vaccine

A vaccine will provide the ultimate tailwind for China’s recovery story.

Four of the nine vaccine candidates that have progressed to final-stage trials are from companies based in China, mainly CanSino, Sinovac Biotech, and Sinopharm. Top bio-safety scientist, Wu Guizhen, said that the coronavirus vaccine will be ready for public use as early as November or December, making China one of the first to reach this milestone.

Digital push

Unlike most of the world, China seems unlikely to become mired in a long recession, not least because of its rapid digital transformation. Online shopping platforms by Alibaba and JD.com, food delivery services by Meituan Dianping, micro-financing platforms by Ant Financial, and payment/ communication apps by Tencent have pushed every-day consumer services online and levelled the playing field between conglomerates and small enterprises. China’s digital economy already accounted for USD$4.7 trillion or 24.8% of GDP in 2018, and the pandemic in 2020 has only accelerated this trend.

The next wave of digital transformation will likely come from the broader adoption of digital technologies by businesses in different sectors that will restructure value chains and boost productivity. Alibaba recently unveiled ‘Xunxi Digital Factory’ which bridges merchants to manufacturers, connecting manufacturing-related data and consumer insights with factory production and management systems to enhance efficiency. This allows merchants to respond to consumer needs, reduce inventory and holding costs, improve profitability and meet personalisation needs. Chinas USD$4.4 trillion manufacturing sector is set to be transformed.

Investing in Chinese tech stocks

Chinese tech stocks should have a place in every investor’s portfolio. This can be expressed via tech focused ETFs like KranShares CSI China Internet ETF (KWEB:arcx), CSOP Hang Seng Tech Index ETF (03033:xhkg), and iShares Hang Seng Tech ETF (03067.xhkg) and also via broader China exposure through iShares MSCI China ETF (MCHI:xnas) or the Schroder ISF Greater China Fund (SISGRCA.MFU), both of  which have tech stocks in their top 10 holdings.

Many Chinese tech firms are also seeking public listings, allowing the average investor to participate in their growth story. The most anticipated IPO of Ant Group, China’s largest digital payments provider and digital finance platform, will be dual listed on both the Hong Kong as well as the Shanghai Star exchange in early October. The IPO is expected to raise a record USD$30B, valuing the company at USD$225B. Investors can trade the Hong Kong listing through their Saxo account on the day of IPO.

Headline Risks

Of course, China’s economic recovery is not without headwinds. Worsening US-China tensions, another wave of coronavirus cases resulting in lockdowns, or a wave of credit defaults will derail the pace of recovery. Investors need to stay vigilant and nimble as always with proper risk management.

Inspiration:

• iShares Hang Seng Tech ETF (03067.xhkg)
• CSOP Hang Seng Tech Index ETF (03033:xhkg)
• iShares Hang Seng Tech ETF (03067.xhkg)
• iShares MSCI China ETF (MCHI:xnas)
• Schroder ISF Greater China Fund (SISGRCA.MFU)