Institutional portfolios commonly get exposure to China through a broad emerging market mandate. Unfortunately, such exposure is typically weighted to large-cap companies and stagnant, “old economy” sectors such as industrials, materials and financial sectors. However, institutional investors are rethinking their approach to investing in China in order to access the drivers of growth and market expansion. A dedicated allocation to China should provide greater exposure to domestic consumption and “new economy” companies with strong fundamentals in the IT, health care and consumer sectors.
China has long been a global growth engine with favorable long-term fundamentals, economic expansion and rising consumer wealth. It accounted for 35% of global economic growth in 2016—a greater share of growth than that of the United States, Europe and Japan combined.
% of estimated global growth (2017–2019 in real GDP)
Note: Based on 2016 GDP Estimates from International Monetary Fund (IMF), and 2017 – 2019 growth projections from the World Bank. There is no guarantee any estimates or projections will be realized.
Sources: Visualcapitalist.com, McKinsey Global Institute Cityscope 1.0; Report as of June 2017.
China’s growth has many drivers: growing domestic wealth, technological innovation, expanded entrepreneurship, a burgeoning services sector and financial reform, to name a few. As a result, there are more opportunities for global investors to take part in China’s dynamic economy as the country shifts away from exports and manufacturing toward innovation, consumer consumption and services.
Consumer and Services surpassed Manufacturing within the past five years
The scale of the opportunity for investors is substantial—and it is growing fast. The liquidity, depth and breadth of listed companies in China is second only to the United States with approximately 5,000 companies, when including those listed on China’s A-Share market. This rapid expansion, supported by China’s government, has undoubtedly created more opportunities but also more complexity for investors.
Sources: FactSet Research Systems, Bloomberg; Data as of August 31, 2017.
Some institutional investors have been hesitant to invest in China due to a perception of poor governance standards and a desire to avoid inefficient state owned enterprises. While caution is warranted, China has embarked on a program of reforms to make markets more investable, transparent and accessible – raising the bar for corporate disclosures and easing foreigners’ access to its domestic stock and bond markets through the Connect program for example.
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Tiffany Hsiao, CFA
The biggest myth about China is that it is still an export led economy. In fact, it is now 2/3 led by tertiary industries like domestic consumption and services.
Andrew Mattock, CFA
The Chinese consumer is going to become an even more powerful driver of where we’re going in China.
Yu Zhang, CFA
We seek diverse exposure across all of the region’s markets to capitalize on the most promising long-term opportunities we see in the market.
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