China: bottom-up opportunity as the macro picture slowly improves
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China: bottom-up opportunity as the macro picture slowly improves

While the top-down story has challenges, the notion that China is ‘uninvestable’ is in our view misinformed. We believe company-specific opportunities can be found by looking at trade, value for money and capital return

  • While the top-down story has challenges, the notion that China is ‘uninvestable’ is in our view misinformed
  • We believe that company-specific opportunities can be found by looking at trade, value for money and capital return
  • Neither the US or China wants tensions to escalate, but the probability of a misstep/accident is not immaterial

Challenges faced by investors in China are well known, including property sector weakness, a lacklustre consumer environment and geopolitical tensions. In response, reports claiming that China is “uninvestable” have proliferated. We acknowledge the challenges but disagree with the assessment. Here are our current thoughts on these factors:

Property sector: Homebuyer trust remains weak amid developer defaults, and despite continual easing measures. Beijing and Shanghai cut downpayment ratios and mortgage rates for new borrowers in January. This followed a fall in tier 1 existing home prices by 1.4% month-on-month, the sharpest decline since 2011. Developer default risk also remains high as falling contract sales are negating government easing efforts.

Personal consumption: 2023 retail sales growth was comparable to pre-pandemic levels but was disappointing given the -1.6% growth we saw in 2022. In a post-pandemic world, consumption patterns have changed from: 1) things to lifestyle, 2) luxury to value, and 3) quality over quantity.  Services consumption growth is expected to continue outperforming goods consumption in 2024. Medium-term consumption growth is expected to slow due to high underemployment. However, this may resolve as programs to address skill mismatches kick in, along with policies intended to promote higher consumption spending (eg, in education, housing and pensions).

Geopolitical tension: While frictions between the US and China have tactically eased, the underlying issues need to be addressed – particularly in relation to security, intellectual property, mercantilism and authoritarianism. Neither the US nor China wants a full-blown escalation, but the probability of a misstep/accident is not immaterial.

Beijing is seeking to offset some of these drags through investment. Infrastructure investment is expected to continue climbing in the first half of 2024 (Figure 1), highlighting the fast pace of government bond issuance that we saw in Q4 2023.

Figure 1: Infrastructure investment in China continues to accelerate (YoY change, %)
2018-2019
2022
2023 F
2024 F
GDP growth
6.4
3.0
5.0
4.7
Retail sales
8.5
-1.6
8.3
6.0
Infrastructure investment
3.8
9.0
4.2
6.5
Property investment
8.4
-8.6
-8.4
-6.0
Manufacturing investment
5.0
8.9
6.4
6.0

Source: Columbia Threadneedle Investments, as at 31 January 2024

Manufacturing investment is expected to remain resilient as the government pushes to accelerate upgrades to manufacturing resources and the production of electric vehicles (EVs), batteries and renewables. While the top-down story has challenges, we think three themes are appealing:

Trade: With an $80 billion trade surplus, China is still a key global trading partner. It is worth noting that trade to other emerging market (EM) economies is increasing, which is plugging the hole created by supply chain diversification efforts. An example here is Chinese EV manufacturers, which are selling into economies such as Brazil and Indonesia. The weakening currency is working in favour of Chinese exporters.

Low cost/value for money: Providing consumers with value for money in a deflationary environment is important. Companies exposed to middle- and low-income consumers and those with strategic management are most attractive in this space – particularly companies competing with the likes of Alibaba and JD.com, as well as Amazon or even Dollar Stores.

Capital return: Given top-down uncertainty, investors will increasingly seek downside protection by identifying companies with low price-to-book ratios, increasing dividend yields and those undertaking stock buybacks. These can be powerful in a deflationary environment.

For investors to feel positive about China from a top-down perspective, the Xi government will need to fix the challenged property sector and restore business confidence domestically, all while projecting an aura of openness and peacefulness on the global stage. (Within the property sector in particular, it would be beneficial to see a clearing event, allowing troubled developers to go bust and remaining players to consolidate.)

We have witnessed green shoots, but they have often been pruned too early. For example, in 2023 we observed improving policy visibility, with announcements of state-owned enterprise reforms and the end of the regulatory cycle. This was cut short, however, by proposed rules to curb spending on video games, which wiped $80 billion off the value of Tencent and NetEase, both of which are widely owned blue-chip China stocks. (Confusion ensued when the announcement was swiftly reversed and the individual responsible at the regulator was dismissed.) This is a prime example of damage to both business and investor confidence, and we are seeing underinvestment by companies and a lack of corporate guidance as a result.

The government has shown it is prepared to provide stimulus, announcing an increase in the central deficit from 3% to 3.8%. This is a positive signal indicating a willingness to use the central government balance sheet instead of burdening local governments to stimulate growth. However, funds have been deployed in infrastructure and new manufacturing sectors and there is doubt that the government will use monies to address underlying issues. The recent banning of short selling and stock purchasing programs are testament to this.

Bottom line

While the macro challenges for China are formidable and will remain a focus for 2024, there are significant company-specific opportunities. The story is also optimistic for many of China’s EM trading partners. North Asian economies such as Korea and Taiwan are benefiting from the improvement in the semiconductor cycle, underpinned by AI demand and the smartphone replacement cycle. ASEAN economies such as Indonesia and Vietnam are witnessing demand for manufacturing capacity, which in turn will be a catalyst for urbanisation and consumption trends.

The main risks we see for the region and EM more generally are uncertainty from elections, the US Federal Reserve sustaining interest rates higher for longer, and geopolitical risk. More than 65% of the world’s population is facing an election in 2024, which could have a major impact on policy direction. However, the muted reaction from China following Lai Ching-te’s success in Taiwan is positive. We are still monitoring China’s posturing but Lai Ching-te has stated he will be pragmatic in working for independence.

20 March 2024
Lin Jing Leong
Lin Jing Leong
Senior Sovereign Analyst, Emerging Market Asia
Krishan Selva
Krishan Selva
Client Portfolio Manager
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China: bottom-up opportunity as the macro picture slowly improves

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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