China’s resilient economy amid the pandemic bodes well for the A-share market, which is set to draw higher interest from global institutional investors.

Having been the first to be struck down by Covid-19 but also the first to bounce back to recovery, China’s economy has seen a near V-shaped recovery after successful efforts at containing coronavirus outbreaks.

Its first-quarter gross domestic product (GDP) had soared by a stellar 18.3% compared to a year ago, with retail sales in March up by 34.2%, topping expectations of a 28% increase.

The world’s second largest economy contracted by 6.8% in the first quarter in last year when the pandemic first broke out in Wuhan, but its economy managed to expand again already in the second quarter. China’s GDP grew by 2.3% in 2020.

The resilience of its economy prompted Fitch Ratings to raise its forecast for the mainland’s economic growth in 2021 to 8%, up from its earlier 7.7% forecast in September. This would be well above Fitch’s estimate of China’s long-term growth potential of around 5.5%, on the back of a significant recovery in Chinese consumption once more people are vaccinated.

In addition to its strong economic fundamentals, China also stands out as an attractive investment destination for several other reasons. It can implement efficient and effective governance with a longer-term perspective on national policies as the state is not hostage to the need for short-term political quick fixes arising from elections.

The domestic market is immense with multiple and diverse demand drivers and adequate buffers from short-term setbacks, cyclical downturns and sectoral corrections. Positive real rates and modest deficit mean that China still has ample policy ammunition to tackle future contingencies.

The country also continues to open up to the rest of the world, which will help to bring in more institutional money to its financial market.

RISING APPEAL

The appeal of the A-share market has been growing in the past years. There are even some suggestions that investors should now consider Chinese equities as a standalone allocation rather than be a part of global or emerging market strategies to reap the full benefits of diversification and returns.

In a survey study conducted by HSBC on nearly 1,000 top global institutional investors and large corporations in December, 62% of the respondents were planning to increase their China portfolio by an average of 25% over the next 12 months. Among the equity investors, 71% were looking to increase China exposure.

In fact, China remains under-represented in most global investment portfolios despite a surge of inflows, which saw foreign holdings in Chinese onshore equities more than doubled over the past two years to more than $400 billion. 

But things will gradually change as China A-shares’ representation in global indices is expected to rise significantly, after MSCI increased the inclusion ratio of China A shares from 5% to 20% in its Emerging Markets Index.

Valuations are not as extended compared to those in developed markets, while another tailwind will be the likely rise of Chinese household assets participating in onshore equities.

OPPORTUNITIES AHEAD

UOB Asset Management sees several areas for investment opportunities in the China stock market after the pandemic.

Firstly, medical infrastructure development will accelerate. As the government will be issuing Rmb1 trillion in pandemic special bonds to fund local public health infrastructure, sectors that benefit are those in medical devices, vaccine development, innovative drugs and related industries.

Second is consumption upgrade, given China’s huge and diverse domestic demand.  Its internet economy has developed by leaps and bounds, and the pandemic has spawned a jump in online games, entertainment and consumption.

Thirdly, the US attempts to contain China’s technology advance has spurred China to accelerate in its own technology and industrial upgrade. The technology sector represented by 5G, semiconductor chips, new energy, and advanced manufacturing is progressing rapidly. 

The pandemic has prompted an increase in healthcare-related investments and lifestyle changes such as telecommuting or working from home, which will see the online economy take on new trajectories.

Some of the long-term goals spelled out in its latest Five-Year Plan (2021-2025) include prioritising the quality of growth rather than the quantity of growth; becoming a self-reliant technological and manufacturing powerhouse; accelerating the drive towards a low-carbon economy to help achieve its climate goals.

As China’s economy is robust and investment opportunities abound, institutional investors globally are expected to keep adding A-shares into their portfolios.