Investing in China: short-term cycles, long-term potential
Is China still a good place in which to invest? This is a question that many multinational companies and foreign portfolio investors have been asking themselves during the past couple of years.
The answer is “yes”,if you can look past the short-term, argues Charles Cheng, Chairman of Societe Generale in China, who says that China has been through a series of economic and political cycles over the past 70 years and always emerged stronger.
It is true that the country currently faces a set of challenges that are likely to define its coming years, if not decades – from a slowing economy to an aging population to environmental questions. But China is not alone in having to tackle these areas, and as complex as they may prove, many of these issues also create opportunities for businesses that can approach them with fresh ideas and technologies.
At the same time, the foundations and opportunities that have underpinned China’s economic success since it started opening-up in the 1980s are still in place. There is the mainland’s massive domestic market, with nearly 400m middle-class consumers, and China is also managing to identify and support the emergence of new growth industries every year, many of which have the potential to become world-leading. So, while foreign investors may wish to rethink the sectors on which to focus, the lure of China, both as a market and a manufacturing base, remains powerful.
In terms of policies, President Xi Jinping’s ‘Common Prosperity’ has been frequently misunderstood, especially outside of China, says Mr. Cheng. Its primary aim is to reduce economic inequality by narrowing the country’s gap between rich and poor. But the focus is less on redistribution of existing wealth than on finding new ways to grow the pie for everyone – after all, there can be no common prosperity without prosperity in the first place.
Should China get this right, ‘Common Prosperity’ has the potential to unlock financing for a whole new group of emerging industries and technologies, as well as funding cheaper, better public healthcare and social services. That, in turn, should give households the confidence to run down traditionally high savings rates, underpinning growth in domestic spending for years to come.
This suggests growth opportunities for healthcare equipment and services, and insurance and financial services generally. Not only is the country continuing to steadily reform and open its capital markets; should the World Bank reclassify China from emerging market to high-income country by 2025 or earlier, it will attract a whole new category of foreign money, says Hugues de La Marnierre, Group Chief Country Officer and CEO of Societe Generale in China.
In technology, there is likely to be a shift from the pure consumer focus of companies like Tencent and Alibaba to cloud services – similar to Amazon’s evolution – as well as artificial intelligence and autonomous driving. Infrastructure will remain a big part of the economy, but the emphasis will shift to clean energy and ESG-driven projects. One recent example is the growth of distributed solar power, installed on urban rooftops by a company partly owned by France’s TotalEnergies and financed by Societe Generale.
Admittedly, China faces some shorter-term challenges. The most urgent, says Wei Yao, Chief Economist and Head of Research for Asia-Pacific at Societe Generale, is how to deleverage the property market. This – including upstream and downstream linkages - accounts for an outsized 30% of economic activity and companies are being urged to recycle capital into more productive sectors such as high-end manufacturing and environmental industries. Similarly, consumers should balance their housing wealth with more investments into bonds and shares, notes Mr. de La Marnierre. China’s government is keenly aware of the risks and is attempting to deflate the property bubble before it bursts.
Further drags on the economy, even if implemented for the right reasons, will be the accelerating push for decarbonization, as it forces households and corporations to pay to reduce pollution; and the need, over the medium term, to tackle the excessive debts of local governments. Meanwhile, stricter rules for technology and private education companies have hit those sectors, while tighter regulations generally have made IPOs and M&A transactions more difficult, especially across borders.
While all of this is likely to slow GDP growth to around 5% in 2022 (from a rebounding 8% last year), Ms. Yao argues that what matters more for China in the long-term is that the quality of growth is improving. And as long as policymakers can sequence their handling of the various challenges, tackling them one at a time and over time, they should be able to manage them.
Investors appear to agree and while the inflow of international funds slowed during 2021, according to CEIC data, they remained resolutely positive since a (global) dash for cash during the first wave of Covid-19 in spring 2020. Meanwhile, foreign direct investment (FDI) is expected to top RMB1 trillion ($157 billion) in 2021, a new record – with more and more of it coming from elsewhere in Asia. Based on those numbers, it would seem that China’s future as a long-term investment destination remains attractive.