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China’s government is committed to developing its domestic market. This effort will expand and accelerate opportunities for investors who are already focused on various onshore sectors and themes.
China’s government is committed to developing its domestic market. This effort will expand and accelerate opportunities for investors who are already focused on various onshore sectors and themes.
China’s growth story remains a compelling investment case.
As tensions between the US and China are likely to persist, albeit in a more subtle manner under a Biden presidency, the Chinese government’s strategy to bolster the domestic economy is gathering pace.
By opening its market wider, China seeks to improve competitiveness, and obtain scientific collaboration with new partners to counter the US’s attempt in restricting China’s access to the global technology supply chain. These goals are aligned with a domestic desire for higher standards of living, which will in turn lead to increased demand for higher quality education, better healthcare and other social services.
While current P-E ratios are slightly elevated for China A shares (14.6x), they are cheaper than those in developed markets (20.6x). Notably, valuations for China A shares are nowhere near the historical highs seen in 2010 (24.3x) and 2015 (18.6x). Furthermore, corporate earnings are expected to grow by 18% in 2021.
A potential risk is that both US political parties want to restrain the rise of China, suggesting tensions might remain or escalate. In addition, any resurgence in COVID-19 cases will affect global demand for China’s exports. Encouragingly, China’s exports have seen some recovery and have shifted from pandemic-related goods (e.g. medical supplies, computers) to regular consumption goods (Figure C2), and will grow further following the signing of the Regional Comprehensive Economic Partnership (RCEP).
Figure C2. China’s export surge is broadening beyond COVID-related goods
Source: GaveKal Dragonomics/Macrobond, October 2020
With the above challenges, China has initiated its “dual circulation” economic approach (Figure C3) to prioritise domestic-led growth. This underscores the potential of the “Made in China 2025” ambition to reduce its dependence on foreign technology.
Figure C3. “Dual circulation” emphasises domestic growth to reduce reliance on external demand.
Growing the domestic market to balance its reliance on external trade.
To help drive this ambition, a stimulus plan was announced in April 2020 to enhance communications networks and use Big Data and Artificial Intelligence (AI). The goal is to fuel China’s next phase of infrastructure development – this includes large-scale data centres and 5G networks – to compete technologically with the US. With these, China remains a growth market too big for investors to ignore.
