Should investors bet on China ?
The allocation case for the world ’ s second-largest economy is the hot debate among fund selectors
By Jamie Gordon
Decades of long-term growth at all costs may have propelled China to its current lofty position , however , its heavy-handed approach is turning immediate issues into structural question-marks , with investors now divided on the merits of the market .
Of the four years of poor returns on Chinese assets , 2023 is shaping up to be the most concerning . The end of zero-COVID-19 lockdowns was supposed to mark the start of a growth renaissance for the world ’ s largest emerging market . Instead , a plethora of economic red flags sees the popular CSI 300 index at its lowest price since February 2019 , as at 25 October .
Rather than rushing to capture the opportunity , many view the slump as China ’ s trajectory for the foreseeable . In fact , Bank of America Merril Lynch ’ s September fund manager survey of 258 money managers found 0 % expect a growth rebound in China , down from 78 % in February and even lower than a year ago while the country was still in lockdown .
Additionally , 21 % named short China equities as the most crowded trade , second only to being long big tech .
Why so Sino-cal ?
Leading this drought of optimism is a long list of well-known tactical and structural risks , ranging from geopolitical developments over Taiwan , the country ’ s embattled property sector , its ageing population , supply chain reshoring and broader indebtedness .
Wouter Sturkenboom , chief investment strategist EMEA and APAC at Northern Trust Asset Management , said his team are strategically “ worried ” on China .
“ The kind of political choices being made are corrosive to investor sentiment , foreign direct investment ( FDI ) is collapsing , the supply chain diversification trend is anti-China .”
He added several “ cyclical developments could turn into structural headwinds ” including its property sector decline and debt dynamics in both local governments and corporations . This requires intervention to restart the country ’ s credit cycle , remove bad debts from banks ’ balance sheets and performing “ big stimulus ” to restore faith in the outlook , he warned .
While the country managed to resolve its banking crisis 20 years ago , Sturkenboom said the balance of probabilities suggests a downside scenario “ is slightly more likely ”.
A moving feast
Thankfully for those who stayed the course on China , the country ’ s leadership rarely rests on its laurels and its responses to some challenges are underway . Addressing the slump of foreign investor enthusiasm , Central Huijin Investment – a unit of the $ 1.4trn China Investment wealth fund – recently bought an estimated $ 1.9bn of ETFs to support tech-focused indices after pouring money into banking sector stocks , according to Bloomberg .
“ Thankfully for those who stayed the course on China , the country ’ s leadership rarely rests on its laurels and its responses to some challenges are underway . Addressing the slump of foreign investor enthusiasm , Central Huijin Investment – recently bought an estimated $ 1.9bn of ETFs ”
Two days later , the National People ’ s Congress ( NPC ) approved $ 137bn of Q4 bond issuance , looking to boost China ’ s GDP by 0.4 % over the next year and increase its fiscal deficit to 3.8 %. While short of the stimulus called for by analysts , it marks a departure from the 3 % ‘ red line ’ and the first time the government ’ s deficit has been raised mid-year since 2000 .
Elsewhere , Xiaolin Chen , head of international at KraneShares , said the government is “ actively supporting ” the property sector by extending debt maturities and lowering interest rates to prevent abrupt defaults .
On geopolitics , Chen noted despite concerns surrounding the Taiwan question and positioning in other conflicts , visits from key US political figures – Secretary of State Antony Blinken and Treasury Secretary Janet Yellen – and business leaders – Jamie Dimon and Elon Musk – this year underscore a shared understanding of the importance of cooperation between China and the US .
Some fund selectors are buying the narrative that China is only temporarily beleaguered . Alex Brandreth , CIO at Luna Investment Management , said the country has suffered a prolonged
18 ETF INSIDER | NOVEMBER 2023