China 2020 and Beyond – A Sustainable Investment? August 28, 2020

Summary

• China’s recovery from the COVID-19 pandemic has placed it on the path of becoming one of the only major economies with positive GDP growth in the year 2020.
• The CSI 300 Index, a capitalisation-weighted stock market index tracking the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, has been up by about 14.9% this year.
• Companies from China are proving to be a strong competitor to its western counterparts in areas such as E-commerce and Technology.
• Relationship between China and United States will continue to be a cause for concern for investors investing in China

Introduction

China’s swift action in combating COVID-19

The COVID-19 pandemic has definitely caught the world by surprise. While the dust has certainly yet to settle, there has been some form of reprieve. Although many countries have made significant progress in battling the virus, the fight will have to continue until a possible vaccine is found. Multiple vaccines may be required together with mass production. One such country that has come a long way is China. Since the initial outbreak in China last December, the country has progressively reduced the number of cases. Despite a recent scare of a possible second wave of spread in Beijing, China has generally done a decent job in keeping the situation under control.¹

COVID-19 spares none

The impact of the COVID-19 pandemic has been widespread, incurring social, political, and economical damages. The crisis is novel not only for its magnitude, but also for the speed at which the economy and labour markets are affected.² Its impact on the labour market has thus far been devastating. In Singapore, the Ministry of Trade and Industry (MTI) has forecasted GDP in 2020 to be between -7% to -4%.³ Preliminary data from Ministry of Manpower (MOM) showed that overall unemployment rate rose to 2.9% while total employment fell more than four-fold.⁴

China’s recovery

Strong rebound in China

While extreme measures to control the spread of the virus has worked in China, its economy has suffered as well. China’s GDP in the first quarter drop by 6.8%, but rebounded and rose 3.2% in the second quarter, compared to a year ago. In fact, the International Monetary Fund (IMF) forecasted that China will be the only major country with positive growth in year 2020 albeit at a low rate of 1%.⁵ The speed of its economic recovery has placed China in a very strong position to further compete with United States on the global front. Aggressive testing and contact tracing, together with strong support from the Chinese government has placed China in a favourable position to lead the global economy. Consumer spending in China has returned but with a shift towards the online space. There is also increased spending in services related to healthcare and wellness. The pandemic has accelerated digitalisation and e-commerce growth, and China is on track to take full advantage.

China’s market strong performance despite COVID-19 pandemic

With the pandemic largely under control in China, the increase in domestic consumption and confidence has also flowed into the stock market. China’s stock market has rebounded strongly. The CSI 300 Index which is a free float weighted index that consists of 300 A-Shares listed on the Shanghai or the Shenzhen Stock exchanges has risen about 14% since the start of the year. In comparison, the S&P 500 index is still on its way to regaining losses after it fell in February. The strong gains on the CSI 300 may suggest that investors sentiments in China are much more positive. Despite the ongoing tensions between China and the United States, Chinese investors have been largely unfazed by the relationship between these two superpowers. While there may be restrictions to non-Chinese investors investing in China’s financial market, there are alternative investments that also track or invest in China.

China’s emergence and growing presence

Online shopping and Chinese companies

With safety measures in place, many daily activities will have to be done in a different manner. One obvious change is the switch online shopping. In China, while overall retail sales were down compared to last year, online retail sales which accounts for nearly 20% of the total retail sales were up by 7% in the first half of this year.⁶ To put things in perspective, retail sales in first half of the year amounted to about USD 2.1 billion, with about USD 700 million coming from the online retail space. E-Commerce companies like Alibaba, JD.com, PingDuoDuo and Tencent stand to gain from this digital shift. These companies were already pushing the boundaries and disrupting existing business models even before the pandemic. With healthcare measures likely to stay in the foreseeable future, these companies will continue to take the lead. In addition, the Chinese are also looking to have a piece of the pie in the innovation and technology space. Chinese companies like BYD, NIO and the recently IPO Li Auto are stepping up and bringing the challenge to bigger companies in the States like Tesla and General Motors.

Increasing FDIs and access to the Chinese market

Foreign Direct Investment (FDI) from United States has also continued to flow into China despite the obvious tension between these two countries. FDI from the States to China rose 6% in the first half of the year.⁷ The Chinese government also eased restrictions on FDI, further opening up its manufacturing and financial services sector to FDI.⁸ Such easing of restrictions with more to come in the future bodes well for the economic and financial growth of China. With easier access to the market in China, foreign investors will push the global market to be much more competitive and efficient, leading to greater benefits for consumers.

Gaining exposure to China’s market

Exchange Traded Funds

There are several Exchange Traded Funds (ETFs) listed in United States that exposes investors to the Chinese market. Funds like KWEB allow access to Chinese internet companies that provide similar services like Amazon, Google, Facebook, Youtube. Other ETFs like MCHI offer greater market exposure to the China markets.

Investors can also seek direct exposure into the Chinese market through these ETFs listed on the Hong Kong Stock Exchange.

Conclusion

The Chinese economy has come a long way since the Chinese economic reform in 1978. China overtook Japan as the world’s second largest economy in 2010.⁹ As countries around the world including China tackles the health, social, political and economic impact of the COVID-19 pandemic, China will also have to deal with the constant uncertainty surrounding its relationship with the world largest economy – the United States. Investors seeking investment opportunities in the large Chinese market will have to be mindful of the situation developing between China and the United States.

The emergence of Chinese tech-giants like Alibaba, Tencent and Baidu has made headway for investors looking for investment in other Chinese companies. Earlier in June this year, FTSE Russell successfully completed its inclusion of China A shares into their global equity benchmark. This is evidence of how the Chinese market has evolved over the years and gained attention from global investors.

Even though a vaccine has yet to be found and a full economic recovery is probably still far, the Chinese market and its lists of Chinese companies listed in the various global markets will remain as promising investment opportunities for global investors.

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