With the second largest economy in the world and seemingly endless human resources, China is the proverbial bull in the China closet. However, navigating how to invest in China is not always easy, but there is no other country quite like it, and ignoring it could prove costly for companies and investors alike.
A number of well-known factors have led Chinese markets lower in the past year giving rise to speculation that a bottom has been put in. A siege of regulatory reform against internet platform companies, Beijing’s totalitarian zero-Covid policy lockdown, as well as the omnipresent geopolitical concerns, continue to weigh on the markets. Let’s look at the macro reasons why in the long run it is hard to ignore investing in China.
Market size and growth potential
While overall growth in China has slowed after years of running at a fast pace, its GDP was back on track in 2021, growing by some 8.1% and reaching $18 trillion. In comparison, the entire 27 nation European Union stood at just $15.75 trillion during the same period. GDP per capita is a metric used to compare the financial health of nations.
With a population of 1.4 billion, China’s GDP per capita was $12,551 in 2021, about six times lower than that of the US. While China is not guaranteed to eventually achieve GDP per capita on par with the US, the gap shows that there is still significant room for economic activity and household wealth to continue to grow.
While most analysts see Chinese GDP growth around 5% for the remainder of the decade, The British Consultancy Centre for Economics and Business Research (CEBR) projects that such growth will propel China past the U.S. to become the world’s largest economy.
Infrastructure and human resources
The vast labor pool and the measurable worker productivity in comparison to other manufacturing sectors around the world make China the manufacturing giant it is today. Secondly, China’s labor market is becoming an asset not just for its size and cost efficiency, but for the quality of education.
The Times Higher Education World University Rankings had 10 Chinese universities in its 2022 top 200 list, the most ever, including two in the top 20.
Innovation and emerging industries
The “Made in China” label on goods in the past generally signified a low-quality product that was often a copycat or counterfeit of something made in America or elsewhere. China’s spending on research and development is equivalent to about 2.5 percent of GDP, which is far higher than other countries at similar levels of development.
The size of the market comes into play again, as China boasts some 800 million people that use mobile payment apps on a daily basis, which is almost ten times that of the U.S. This makes China and its one billion internet user not only a target of sales and innovation, but has fueled its own fintech industry.
TikTok, which is owned by the Chinese company Bytedance, now has one billion monthly users, even though the platform is not available in China itself.
The markets of late are taking notice, as Chinese stocks bounced back strongly last week following an announcement that the Chinese government will be supporting its markets and signaling for a closure on a months-long tech crackdown. In addition, some $6 billion flowed into Chinese-focused equity mutual funds leaving investors optimistic about perhaps finding a market bottom.
If you are still traumatized by the previous deep market drop and the randomness of regulatory assault on specific sectors, there are always ETF’s to turn to. Dan Niles, a senior portfolio manager at hedge fund Satori Fund says, “The last thing I want to do is buy one company and have that be the one that gets absolutely killed.”
Options include exchange-traded funds such as the KraneShares CSI China Internet ETF to diversify the risk. Other funds include iShares MSCI China ETF and the Xtrackers Harvest CSI 300 China A-Shares ETF, both of which, according to Morningstar data, have seen large inflows in the month of June. If you are more adventurous and don’t mind taking on the stock-specific risk, here are a couple of Chinese stocks worth taking a look at.
Li Auto
If you like Tesla and are sold on electric vehicle makers then Li Auto is worth a peak. Q2 deliveries were 28,687, up 63.2% vs. a year earlier, but down 9.55% from Q1. Still, that was well above Li Auto’s prior target range of 21,000-24,000 units. The share price has roughly doubled since its May lows and is currently consolidating near $40 for perhaps another move up. Li Auto has an aggressive buy rating from Investor’s Business Daily as well.
Tencent Holdings
Tencent Holdings is a Chinese internet conglomerate founded in 1998. The company’s businesses span communication and social services including Weixin and QQ, targeted advertising, cloud fintech, and business services. Like some in the Chinese technology sector, Tencent has been cut roughly in half since its 52-week highs in June 2021.
CEO Ma Huateng acknowledges the rough patch, but stresses that investors in it for the long haul will be rewarded by the company’s investing in strategic growth areas like enterprise software, Video Accounts, and international games.
Analysts are bullish as well, with 36 strong buy ratings, versus four holds and no strong sells, according to S&P Global Market Intelligence.
