Investing into China

Macro 5 minutes to read

Summary:  China seems to be the bright spot to emerge first from the covid19- induced slowdown. The OECD has projected that China will be the only G20 country expected to see growth this year; output for FY2020 is expected to rise 1.8% which is a sharp upward revision from the 3.7% contraction projected back in June.


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)

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.