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Upside Surprise Waiting in the Wings of “New” China: Part 1

Buoyed by reform-oriented government policies, optimism is rife in China over the growth prospects of the “new” China economy – setting the stage for potentially solid gains for China investors.

The “new” China economy which is represented by the shift in focus from export-led to domestic-generated growth bodes well for China, whose GDP is expected to grow at a sustainable pace of 6.6% in 2017 and 6.2% in 20181.

Incidentally, up until 2015 when government reforms took effect, China experienced a decade of double digit GDP growth, during which its economy increased in size by almost 400%, from US$2.7 trillion to US$ 11 trillion2.

But experts from China AMC, the sub-advisor of the Excel China Fund, suggest that slower growth in China is “a good thing.” They contend that slower growth is more sustainable, compared to double digit growth rates which are unsustainable. Thus it is fair to say that China is not slowing down, its economy is simply transitioning to a new state, reducing the probability of major disruptions. According to Li Wei, head of the Development Research Center of the State Council, China’s economy now faces "almost zero big downside risk."

Currently, the Chinese economy is about 7 times the size of the Canadian economy and growing at more than 3 times the rate3 - providing perspective on the magnitude of the China investment opportunity relative to the Canadian market.

In fact, China is the largest emerging market in terms of equity capitalization and the second largest among all markets, behind the US4

“While the ‘old’ Chinese economy was largely driven by manufacturing and exports, the ‘new’ China economy is being fuelled by services and consumption, led by the healthcare and technology sectors,” says Christine Tan, Chief Investment Officer of Excel Investment Counsel Inc.

Incidentally, since the beginning of the year, China’s macro-economy has stabilized, fuelled by strengthening industrial output, an expanding service sector, rising retail sales, steady growth in electricity generation, power consumption and rail volume, and robust domestic demand – quelling overblown concerns of a potential hard landing. 

Given the positive signals in China, Barclays Capital recently noted there is an upside surprise waiting in the wings for China investors. "We think the latest data from China point to continued robust growth," says Jian Chang of Barclays in Hong Kong5.

Currently, valuations in China are quite attractive, highlighting the upside potential of Chinese equities. China’s onshore equity markets have corrected significantly from their 2015 highs, with non-financial blue chip companies trading at a 15-20 times price/earnings ratio, accompanied by healthy dividend flows.

Excel believes that stocks in specific sectors such as Healthcare, Education, Environmental Protection, and Domestic Consumption will especially benefit from reforms. These multi-year secular themes, in our opinion, have higher growth potential and pricing power and are less correlated to GDP growth.

With boots on the ground, through China AMC, one of the largest asset managers in China, the actively-managed Excel China Fund is uniquely positioned to leverage growth opportunities in the country for the benefit of its clients.

 

[1] IMF World Economic Outlook accessed on April 18, 2017

[2] Bloomberg Data as at March 31, 2017

[3] Trading Economics website accessed on March 31, 2017

[4] Business Insider, November 6, 2016 

[5] China Hard Landing Story Dies Another Day, Forbes, March 3, 2017 

 

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Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.