Although it is already a major driver of the global economy, China has launched structural reforms with a view to generating more sustainable and environmentally friendly growth.
According to Haiyan Li-Labbé, a fund manager specialising in Chinese equities at Carmignac, China’s restructuring could create long-term investment opportunities in four areas: technological innovation, ecological transition, changing consumption patterns, and health and medical innovations.
Li-Labbé points out that the covid-19 health crisis has reinforced China’s strategic shift, even though it was initiated before the pandemic. She adds that the crisis has actually strengthened China’s economic power at an international level.
Its exports have benefited greatly from the support measures in the US and Europe in 2020, and the country also stands to gain from the recovery of the global economy expected this year. In addition, China demonstrated its research and development capabilities by launching five vaccines against covid-19.
Covid beneficiary
“China appears to be one of the big winners of the covid-19 crisis, which has accelerated the technological revolution and the digitalisation of the economy by profoundly changing consumption, work and entertainment habits,” Li-Labbé says.
She adds: “Several Chinese companies are among the world leaders in key sectors of this revolution such as online commerce and payments. In addition, the economic support measures announced since the beginning of the pandemic by the Chinese government have focused on key new infrastructures such as 5G, data centres, the cloud, and artificial intelligence.”
It is worth remembering that the Chinese economy was the only major world power to escape a recession in 2020 thanks to effective management (relatively speaking) of the health crisis. This allowed it to rapidly relaunch manufacturing and increase consumption levels in the country.
It is now one of the main drivers of global growth. According to the OECD, China’s economy is expected to grow by nearly 8% in 2021, after growing by 2.3% last year. This is in contrast to an expected eurozone rebound rate of 3.9% this year, after a 6.6% drop in 2020.
As a consequence of the positive backdrop, Li-Labbé is bullish on the Chinese market. “Given the country’s economic potential, Chinese equities should offer superior investment opportunities over the next 10 to 15 years, provided that we adopt a selective, long-term approach”.
While Chinese growth prospects are encouraging – concerns remain over inflation which could yet prove a significant headwind.
Chi Lo, senior strategist for greater China at BNP Paribas Asset Management points out that producer price inflation (PPI) has been rising in China, which is a major buyer and supplier in global markets. “Markets are right to worry if China is raising prices. If buyers of Chinese goods are paying higher prices, China is exporting inflation to the world”.
Disinflationary force
But as Lo points out, China’s role as the world’s leading purveyor of manufactured consumer goods has added a significant disinflationary force into the mix. “As the world adjusted to the pandemic, China did not take advantage of high US demand to raise prices despite rising PPI inflation at home. In my view, this was because Chinese manufacturers fear losing global market share. Chinese firms do not, as the market assumes, always maximise profits. Rather, they aim to maintain social stability and output growth, preserving market share and, more recently, reducing costs through new technologies.”
He explains that China has been absorbing much of the PPI inflation, not passing it on to consumers.
According to Lo, when economies (China’s included) reopen, price pressures from supply bottlenecks due to covid-19 disruptions will clash with the post-pandemic recovery in demand. However, he argues they should fade when economies have normalised in the absence of wage-price spiral pressures. The result, Lo suggests, is that inflation volatility can be expected to rise in the coming months, but it is unlikely to be sustained.
For asset managers looking at Chinese equities specifically, Lo insists that in an environment where the credit impulse is declining and inflation is squeezing corporate profit growth, pricing power will be a crucial factor for stock performance.
“Stocks of companies with great pricing power and strong margins will benefit,” he concludes.
