It is no secret that China faces a number of headwinds, including slowing growth, a high debt-to-GDP ratio, an ageing population and Covid-19.
But much has changed since the outbreak of the virus more than a year ago. With an annual growth rate of 2.3% for 2020, China is the only major economy to have expanded last year. Official data from the National Bureau of Statistics show that GDP increased by 6.5% in the fourth quarter of 2020.
When it comes to Chinese equities, though, nominal income aggregates such as household incomes and wealth represent more important growth metrics than GDP growth. This is good news for equity investors as the middle class in China continues to grow. According to a brief by HSBC’s Herald van der Linde, head of equity strategy, Asia-Pacific, 47 million Chinese already live in households with annual incomes of more than US$50,000.
Wenli Zheng, regional portfolio manager at T. Rowe Price, expects this number to increase over four times in the next 20 years, making the story of the Chinese consumer ‘one of the world’s most exciting for equity investors’.
‘China will remain a key growth economy over the next decade and as they open up their markets, investors will want more exposure,’ Edward Moya, senior market analyst at forex trader Oanda, believes. Investors, he says, will focus on the country’s longer-term transformation to a consumption-led economy.
But the transition away from an economic model based on fixed-asset investments and lower value exports to one driven by domestic consumption has caused China’s growth pace to slow down. From dizzying double-digit figures, pre-pandemic GDP growth went to a more sustainable level of 6.1% in 2019.
Chris Kushlis, emerging markets sovereign analyst at T. Rowe Price, said: ‘From around 2006, the Chinese government began trying to rebalance the economy, moving away from a predominantly export-driven model, toward a more domestic-based model. This shift is aimed at engineering more sustainable, long-term growth. Further slowing in the rate of growth is likely as this transition continues.’
Rising middle class
Today, China’s growth is driven primarily by the steady expansion of the wealthy middle class, which has been particularly beneficial for education and consumption-led areas of the economy, including education, tourism, insurance and automobiles.
Ecommerce is also booming. China continues to be the largest online retail market, with revenue expected to grow to more than US$1,4tn in 2024. Last year alone, 24.9% of the total retail sales in the country were made online, up from 20.7% in 2019.
At the same time, China is finding answers to its ageing population problem in pharmaceutical developments. With over 4,000 pharmaceutical players, China represents the second-largest pharma market globally, with a vast growth potential that is fuelled by government initiatives.
The economic transition has also meant a shift away from state-owned enterprises, with China’s private sector contributing over 60% of the country’s GDP. That leads to a greater focus on corporate governance, transparency and quality of management.
On the up
Concurrently, China’s market is opening up to international investment. The inclusion of domestic A-Shares in the FTSE Russell global equity benchmarks from June 2019 as well as the Bond Connect scheme unveiled in 2017 and the Shanghai/Hong Kong Stock Connect scheme launched in 2014 are driving foreign direct investment (FDI) into a country that has historically been difficult to access for international investors.
The United Nations Conference on Trade and Development suggests that China was the world’s largest FDI recipient in 2020, with a 4% increase in inflows to $163bn. That stands in stark contrast to global FDI, which fell by 42% last year.
The purchase of Chinese equities and bonds is unlikely to slow down any time soon. According to the People’s Bank of China (PBoC), foreign investors held a record ¥2.46tn in Chinese stocks in June 2020, up 50% from a year earlier. Meanwhile, bond holdings surged by 27% to an all-time high of ¥2.57tn over the same period.
But it doesn’t end there. With China’s economy fully recovered to pre-pandemic levels, policymakers have turned their attention back to reducing the country’s growing debt burden. ‘Authorities have recently moved to arrest the ballooning level of debt. There is still more to do, but progress has been made,’ Kushlis noted.
In recent months, the central bank has also adopted a more conservative stance – away from reserve ratios and interest rate cuts – that reflects the country’s way back to normal. After all, the PBoC has many weapons in its arsenal to help manage and ensure the stability of China’s economy throughout 2021 and beyond.
Emerging markets are less established than developed markets and therefore involve higher risks.
FTSE Russell – London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
For investment professionals only. Not for further distribution.
The specific securities identified and described are for informational purposes only and do not represent recommendations.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
DIFC – Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This document is communicated on behalf of T. Rowe Price International Ltd by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA ex-UK – Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland – Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK – This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
 Source: Researchandmarkets.com. Growth Insights on China’s Pharmaceutical Industry, Forecast to 2025.