China: Will the recovery continue to misfire?

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China: Will the recovery continue to misfire?

Bin Shi explains how his team is positioning for potential positive market catalysts

China 19 Sep 2023

Bin Shi

Head of China Equities

Key insights:

We believe the demise of the Chinese economy has been greatly exaggerated. China is in a different growth stage and economic environment, but it is on a long-term growth trajectory with a lot of potential.
Market sentiment on China is overwhelmingly—we would say unjustifiably—negative, having fallen back to the level of last October when Covid-19 restrictions were the tightest. China equity is a complex and volatile asset class, however, given the already low valuations in the market, there will be a higher chance for a meaningful rebound rather than downside surprises.
Government policy appears to have reached a turning point in recent weeks, starting with the lifting of some homebuying controls across Chinese cities. However, because the government has been slow to act, it will likely take longer and bigger support measures to make an impact on a sputtering economy.
We think the probability of a systemic financial crisis remains low. The targeted policy support to date, coupled with nascent signs that global manufacturing activity may be inflecting positively, may provide sufficient cushion to prevent increasingly negative outcomes for the Chinese economy.
We are hopeful that a clear direction will now be established to support sustainable growth, and continuous policy support will follow. That said, a massive stimulus package is unlikely from our perspective.
Strong competitiveness from Chinese corporations is keeping us optimistic in staying invested for the long term. Not only are they adapting to the various external challenges in this volatile environment, they continue to invest in technology, invest in research and development (R&D), control costs and grow their business. And China is going global. Chinese companies are quick to adapt and successfully competing with well established global brands in international markets, such as those in the electric vehicles and online gaming sectors.
Chinese equity markets still hold significant opportunities for active investing in our view, especially with cheap valuations and more government support to come. We see particular opportunities in health care, consumer and financial services.