Capitalizing on China’s Economic Transformation

Discover the reasons why institutions are rethinking their investment approach to China

Allocating 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 financials. 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 communications, consumer staples and health care sectors.

Insights for Institutions

A new global study from Greenwich Associates and Matthews Asia reveals how institutions are planning to optimize their exposure to China.

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Unparalleled Growth

China has long been a global growth engine with favorable long-term fundamentals, economic expansion and rising consumer wealth. It accounted for 32% of global GDP growth in 2018—a greater share of growth than that of the United States, Europe and Japan combined.

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

Share of GDP by Production Approach chart

Sources: CEIC; as of March 31, 2019.

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
Consumer and Services surpassed Manufacturing within the past five years

Number of companies with Market cap greater than $50 Mil

Sources: FactSet; data as of June 30, 2019.

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.

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