China’s GDP recorded growth of 18.3% y-o-y in the first quarter of this year, according to the country’s National Bureau of Statistics. This is due largely to the low base recorded during the early stages of the pandemic in the same period last year. However, the global economic recovery is also accelerating China’s economic growth.
China is under-represented in the global indices
So why is China a sleeping dragon? This is because global investors have to date been able to make only relatively small direct investments in the A-share market. One reason is China’s under-representation in global stock indices, compared to the size of its economy and financial market, and this situation is expected to continue. If foreign capital only focuses on passive index investment, this may be insufficient investment in China’s stock market. For example, the International Monetary Fund (IMF) estimates that China accounted for more than 16% of global GDP in 2019, surpassing the EU’s 15.4%. Yet, China accounts for only about 5% in the MSCI All Country World Index (ACWI). It is an imbalance that is expected to continue.
Undoubtedly, there are reasons for China’s under-representation in global indices. For example, until recently it has not been easy for foreign investors to access the A-share market. But with the Chinese market opening up, many international index providers have increased their weighting of Chinese stocks — the proportion of China stocks in the MSCI ACWI is expected to double. In fact, in time, China will be regarded by investors as an independent asset class, just like the US or Japan.
Prudent policies to prevent further expansion of leverage
If we consider the growth potential of the stock market only, there is no shortage of exciting news about the Chinese market and the companies in it. Recent years have seen some extraordinary innovation in China, such as the pharmaceutical and healthcare sectors, with AI in medical diagnosis as a way to help deal with the shortage of doctors, along with significant advances in the development of genetics and cancer drugs.
As well, in order to achieve carbon neutrality by 2060, China has invested vast resources in the development of renewable energy, electric vehicles, hydrogen and other clean technologies.
China is the largest electric vehicle market in the world and, what’s more, 99% of electric buses around the world are made there. China is also a leader in solar energy technology development, where solar energy production costs already average below fossil fuels in many cases.
Last but not least, although the economic policies and investment projects in China are mainly driven by the Chinese government, last year they were actually more “traditional” in nature than those of many Western countries. This means that while many European and American countries have launched huge stimulation measures to deal with the pandemic, China’s efforts were relatively mild — clearly a result of the experience gained by the Chinese government in the global financial crisis in 2009, when China launched a large-scale fiscal stimulus plan that resulted in a huge increase in debt.
This year, as China’s economy has quickly emerged from the shadow of the pandemic, policies have been flexibly coordinated and become more cautious. It is expected that China will reduce policy support and investment expenditure levels to prevent further increase of leverage.
Anthony Wong is portfolio manager with Allianz Global Investors.
