Feb 11, 2020
After years of export-fuelled expansion, China’s economy is rebalancing towards domestic consumption. Different industries and a new set of companies will drive the country’s future growth. What are the implications for investors?
For a start, ‘old’ economy industries need a careful investment approach. To tackle overcapacity, Beijing has radically reformed sectors such as steel, cement, coal and shipping. While this restructuring has strengthened companies by improving cashflows and reducing capital expenditure and leverage, it is also fuelling consolidation. Consequently, investors need to identify which businesses are best positioned to emerge as winners over the long term.
At the same time, myriad opportunities are being created in the ‘new’ economy, as the rising affluence of the Chinese consumer, the trend towards upgrading to premium products, and the technology-driven transformation of China’s rural communities accelerate growth in sectors such as consumer discretionary, technology and healthcare. China is already the world’s second-largest domestic consumption market, but these sectors remain small relative to their weight in developed economies. That gives them substantial headroom for further expansion.
There are risks to China’s growth prospects, including structural stresses in the financial sector and the potential for geopolitical headwinds to arise, perhaps from a re-escalation of trade tensions between China and the US.
But with the Chinese government committed to pro-growth policies and mindful of past mistakes, we think China’s growth outlook remains bright. However, in our view, it will require in-depth knowledge of China and an active approach to uncover the most attractive opportunities.
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Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
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