Capitalizing on China’s Economic Transformation

Why institutions are rethinking their investment approach to China

Investment Case

Rethinking Allocations to China

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.

Unparalleled Growth

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.

Thinking Through Global Growth

% 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.

Rebalancing of the Chinese Economy Well Underway

Consumer and Services surpassed Manufacturing within the past five years

Sources: CEIC.

Market Expansion Translates to More Complexity

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.

China’s Expanding Universe

Sources: FactSet Research Systems, Bloomberg; Data as of August 31, 2017.

Liberalization and Financial Reform

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.

China Research & Insights

Explore our in-depth coverage of the challenges and opportunities present in China's market.

Investing in China

For more than 25 years, Matthews Asia has been providing investors with access to opportunities created by China’s profound economic transformation.

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Investment Team Spotlight

Our China portfolio managers offer deep experience in the market and are committed to helping you understand and capitalize on its long-term growth potential.

Tiffany Hsiao, CFA

Portfolio Manager

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

Portfolio Manager

The Chinese consumer is going to become an even more powerful driver of where we’re going in China.

Yu Zhang, CFA

Portfolio Manager

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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Disclosure and Notes

FOR INSTITUTIONAL USE ONLY – NOT FOR RETAIL DISTRIBUTION

The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Past performance is no guarantee of future results. Investing in international and emerging markets may involve additional risks, such as s ocial and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The information contained herein has been derived from several sources believed to be r eliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC (“Matthews Asia”) does not accept any liability for losses either direct or consequential caused by the use of this information. This report is for informational purposes and is not a solicitation, offer or recommendation of any security, investment management service or advisory service.