At around 1.6bn China has the biggest population in the world living on the fourth largest land mass. It is also the second largest economy today, and is rapidly closing in on the US at number one. Some analysts believe this will happen before 2030.
That combined potential makes China an attractive place to invest today. So what are the big themes that investors should understand before taking the plunge?
Investment strategy, economics and fund management experts at Investec, the investment bank and wealth manager, flag their top five trends to watch through 2018.
1) CLEANER, GREENER GLOBAL LEADERSHIP
The US’s Donald Trump may have walked away from the Paris climate accord but China’s leader, President Xi Jinping, has made it clear that he has no intention of following.
At the recent World Economic Forum in Davos, Switzerland, Jinping laid out the steps China is taking to fill gaps left by what appears to be an increasingly isolationist American policy.
China is already home to eight of the world’s top 10 solar panel module manufacturers, four of the world’s top 10 wind turbine manufacturers and four of the world’s top eight electric vehicle battery manufacturers.
2) AN EMERGING TECHNOLOGY SUPERPOWER
China may still be best known as the cheap and cheerful low-cost manufacturer to the world but this is also fast changing. Thanks to the likes of Alibaba, Tencent, Baidu and JD.com, e-commerce in China is already roughly double that of the US, with China being by far the biggest global market.
Mobile payments in China are 11-times that of the US ($790bn versus $74bn in 2016, according to Investec’s statistics), being used for things like restaurant and cinema bookings, food delivery and increasingly streamed content (music, TV shows and films).
3) EASIER-TO-TRADE CHINESE STOCKS
MSCI announced that 222 large cap Chinese A-shares will be included in the MSCI Emerging Market and ACWI indices through a two-stage process from June 2018. MSCI stands for Morgan Stanley Capital International, an investment research firm that provides indices, portfolio risk and performance analytics.
Inclusion in these globally accepted investment indices represents a milestone in the evolution of China’s domestic stock market, the second largest in the world by market capitalisation.
It demonstrates how Chinese authorities are opening up its markets to foreign investors, especially through the Hong Kong and Shanghai/Shenzhen Connect schemes. Overseas ownership of Chinese stocks currently stands at under 3%, says Investec.
4) RENMINBI AS A GLOBAL RESERVE CURRENCY
The Chinese Renminbi currency is already starting to show attributes of a reserve currency as its importance grows on the international stage. A reserve strong currency is one that is widely used in international trade that a central bank is prepared to hold as part of its foreign exchange reserves.
The Chinese Renminbi since 2016 has been part of the International Monetary Fund’s (IMF) Special Drawing Rights basket of currencies, going from 0% to over 10% of the IMF total.
This reflects the importance of China as a global trade powerhouse, as well as the hard work that is ongoing in China to repair its reputation and become a major world currency.
5) CHINA’S DEBT GROWTH IS SLOWING
China has a huge debt mountain to deal with. In 2008, China’s total debt was about 141% of its gross domestic product (GDP), yet by the middle of 2017 that number had risen to 256%.
That compares to about 125% for the US, 115% here in the UK and the 170% and 260% for Greece and Japan respectively, according to OECD data. China’s government is committed to doubling the economy between 2010 to 2020, and getting there will presumably require more loans.
Yet Investec’s research suggests that the rate of increase in national debt in China is ‘clearly slowing.’
In the investment bank’s view, this is an important trigger for improved market sentiment around the trajectory of growth for China’s economy, potentially providing asset valuation support, even though overall a slowing rate of growth is expected.