As the People’s Republic of China turns 70, we look back at how far the economy has come and where it could go.
Investing in China: What does the future hold?
This week marks the 70th anniversary of the founding of the People’s Republic of China, providing an appropriate moment to assess the country’s development over that time and what its future prospects might be from an investment perspective.
In political terms you might conclude that not much has changed over the past 70 years. After all, China is still a single party communist state where the government has very extensive control over people’s lives and those who protest against it face considerable problems. The people of Hong Kong are now experiencing the difficulties of dealing with a government that is sensitive to dissent and is quite prepared to deploy forces to impose its will.
However, there’s no denying that the relaxation of economic controls has led to a huge and sustained boom for the country, taking it rapidly up the international list of leading economies to second place behind the US. The development of the middle classes and the steady transition away from dependence on exports and towards stronger domestic demand is an especially positive trend for investors, as it provides more balance and stability, and is likely to continue in future.
It isn’t all plain sailing though, with the ongoing trade dispute between China and the US leading to higher tariffs and raising the risk of slower growth. But it is worth noting that US trade only accounts for 3% of Chinese GDP.
The road ahead
Investing in emerging markets, not just China, has been a volatile business over the years, and investors need to be aware of the risks. Striking the balance between benefitting from growing markets overseas and not taking an undue level of risk is an important judgement for every investor. While China’s economy has slowed in recent times its GDP is still expected to grow in excess of 6% this year, which is much higher than most large developed countries, and foreign investors have greater access than ever before to China's domestic markets. System reforms and deleveraging from debt-funded infrastructure spending are also ongoing.
The Chinese government has many ways of providing stimulus to the economy, such as through extra spending in key areas. The Belt and Road initiative, also known as the “New Silk Road”, is one such project. It seeks to boost the Chinese economy by establishing large and long term connections with many markets in the region and beyond. Colossal in scale, it now encompasses 71 countries in Asia, Africa and Europe focusing mainly on major infrastructure projects such as ports and railways. Chinese state-owned companies are very much involved in this, the latest example of how they are increasingly collaborating in major international projects.
For most investors the best way to gain exposure to China is through funds and we list our favourites below:
Launched in 2006 the fund aims to deliver capital gains by investing in Chinese and Hong Kong companies over the long-term. The lead manager is Charlie Awdry, supported by May Ling Wee who joined Henderson in 2015 and has more than 20 years of industry experience gained in Singapore and Hong Kong. The fund is fairly concentrated with the largest exposure in the insurance, technology and leisure sectors.
China’s growth has benefited many of its neighbours and those investors looking to benefit from that could consider this fund which has a good long-term track record by leveraging the local knowledge of Schroders' extensive network of analysts in the region and has been managed by Matthew Dobbs since launch in 1995.The main objective is to achieve capital growth through investments primarily in equities of companies located in Asia, excluding the Middle East and Japan.
For investors seeking a lower cost option this fund tracks the MSCI China index which itself tracks those stocks listed in China which are open to international investors. There are just over 150 constituents including both large cap and mid cap stocks covering 85% of the China equity universe. Information Technology represents the largest sector weighting. The fund offers a dividend yield of roughly 1.3% which is paid out semi-annually and has a total expense ratio of 0.6%.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.