Week 10: A Bullish View on China

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Week 10

A Bullish View on China

China will continue to provide a bullish case for investment as it continues its transformation from a ‘developing middle-income’ economy towards a ‘high-income’ growing economy

We are increasingly bullish on Asia’s largest economy, believing it will avoid a financial shock and will continue to present significant investment opportunities for global investors. Over the next ten years we expect to see China overcome recent macroeconomic challenges, side step concerns of a dramatic financial shock and continue its transformation towards a high-income economy by
2027.

Whilst we expect China’s economic growth to slow down from the lofty 7 to 8% levels of the past towards a more sustainable 4.5%, we suspect that this rate of growth will be more than sufficient to support China’s transition towards a high-income economy. As a result, we would expect to see a significant increase in the country’s GDP per capita from around $ 8,000 currently to more than
$ 13,000 by 2027 and this should result in China’s stock markets continuing to outperform the broader Emerging market indexes. Leading the transformation of China’s economy will be the IT, consumer and healthcare sectors which will benefit significantly as income levels rise in China pushing the country towards growth led by consumption, the services industry and high value-added
manufacturing.

Despite such optimism, we do acknowledge that China faces external as well as domestic risks that could derail its growth prospects. History is not kind in this sense as it is a significant challenge for historically low to middle income economies to transition to high income status and with some concern lingering over the current global economic environment, current conditions may present a
barrier in the near term.

In our opinion the most significant challenge facing China is the increasing risk of trade protectionism and whilst this could have a direct impact on the county’s exports, it could also negatively affect corporate sentiment. More broadly any reduction in the flow of goods and services and rising competition in a more protectionist global economy could threaten to reduce the exchange of ideas
and slow the rate of technological transfer that has been such a strong driving force behind the transformation of China’s economy

Despite the obvious risks and concerns we believe investors would be best to focus on the strong upside potential of China and its powerful economy and we continue to downplay risks regarding the build-up in China’s debt position because a large amount has been funded by the country’s own savings and the debt has been used to fund investments rather than consumption.

Other notable points of strength for China include the country’s strong net asset positions, current account surplus, high level of foreign exchange reserves and a general lack of any significant inflationary pressures.

We are confident that investors into China’s story will continue to outperform both developed and emerging market options as economic growth will remain comparatively high for many decades to come, policy options remain adequate and policy markets have room to move in managing the debt cycle. As the economy moves steadily upwards investors can look forward to significant outperformance over the longer term.