China - the Long March Upwards

Fri 20 Oct 2017

By Brian Dennehy

Access Level | public

Market commentary


China funds are a bit of a star this year, as saw here.  But so have they been since 1987.  Nonetheless the media comment over the last week is mostly negative – but it has been for 30 years!  Such a negative habit is not easily broken.
Investors too have been fretting about China for most of that 30 years. This is the opposite of “home bias” - this is the tendency of investors to invest far too much in their home market simply due to familiarisation. Similarly investors tend to find easy (simplistic?) reasons to avoid the furthest flung nations because of a lack of familiarity. 
As you probably know already, China is going through a massive restructuring and re-balancing of its economy.  Away from a reliance on exports and huge capital spending, and towards a more buoyant economy driven by consumer spending.
For example, when this transition began it was supposed to presage a disaster - there wasn’t one. In fact domestic consumption now makes up 63% of their economy (gross domestic product) compared to just 44% in 2010.
China vs US
In the midst of this period of positive change it is also worthwhile comparing the US to China.
We reproduce below a table used in a previous blog (which also considered India).  You can see here from the GDP per head number that China still has huge growth upside.  And compare the growth rates.
The obesity number is slightly light-hearted – yet in its way still indicates growth potential!
While Trump is trying to turn his back on the world, Xi and China and reaching out with the "Belt and Road" initiative.  Much more on that here in an earlier blog “Robots and the middling revolution”.
Politics and power
We can debate endlessly the minutiae of Chinese politics – and many have in the last few weeks.  As a minimum we can say that China is not burdened by the occasional inconvenience of democracy. The Chinese transition in recent years could not have occurred in Western democracy – keep an eye on France to confirm that one.
Xi’s supremacy is beyond doubt.  It is how he uses that in the years just ahead that the Western chattering classes fret about.  Apparently China has entered a “delicate phase” according to the FT, amongst others.  But it has been in a delicate phase for 30 odd years by western yardsticks.
The problem for those in the West is that there are no precedent to guide thinking on China.
While they carry on fretting, investors should be considering how to get on board, if they're not already.
China stock markets and valuation
In the words of specialist fund group RWC “the expectation on China has recently recovered to a more rational level after several years of collapse, but it is still far from bullish”, AKA over-valued.
The Chinese stock market this year has been driven by IT, in a similar way to the US.  China has its own FAANGS in the guise of Alibaba, Tencent, and Baidu.  But the growth trend in these Chinese IT stocks does appear to be at an earlier stage – if we are correct there is much more to go for, for years to come.  
Undoubtedly if there is a global tumble in markets, perhaps led by those FAANGS, the Chinese market, and their IT megastocks, will fall sharply too.  But these Chinese stocks should have bounce-ability – on weakness we would be undoubted buyers.
And China is certainly not merely a tech story.  The potential upside across key sectors can be illustrated by the fact that health expenditure in China is 5.5% of GDP – in the US it is 17.1% - Germany 11.3%.  There is lots of upside across a range of sectors.
But should you buy now?  And which funds? We look at that here.


Table 1





Best fund (last 10 years)




GDP per capita ($)




Total population (bn)




GDP real growth rate




Obesity (% of adult population)




*S&P 500 index
Performance data: 10 years to 28/7/17.  Statistics sourced from CIA World Factbook.  All data 2016 est. except for obesity (2014).  GDP per capita calculated on purchasing power parity basis.


Market commentary


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