For the past year, commentators have been discussing just how far Chinese growth will fall.
That has been accompanied by questions about how many billions of dollars of debt is stuffed into the dark corners of its financial system by off-balance sheet loans.
Despite those worries, the China CSI 300 grew 45.9 per cent in sterling terms last year. The Hang Seng rose 12 per cent during the same period, while the MSCI China index posted 14.7 per cent.
Matthews Asia investment strategist Andy Rothman says: “With inflation-adjusted income up about 7 per cent in China, compared to 2 per cent in the US, consumer spending is booming – up 11 per cent versus 2 per cent [in the US].
“Media headlines, however, continue to tell us that China’s economy is doomed.”
Chinese income growth is slowing, he admits, but it is from a phenomenally high rate compared to western democracies.
One issue is the large zombie-like state-owned enterprises. Rothman says these are unlikely to be swept aside in bulldozing reforms as they may have been decades ago as the people would revolt.
“This is one reason why I have low expectations for further SOE reform in the near future,” he says. “Closure of many money-losing and indebted steel and cement plants isn’t likely for a few more years, while the party wrestles with the problem of how to deal with the unemployment consequences of shutting the largest employer in small cities.”
In a year where access to A Shares was boosted by the Shanghai Hong Kong Connect regime, Fidelity China Special Situations manager Dale Nicholls says a quarter of his £759.8m trust is held in mainland shares.
Most of those investments are in large, utility-like businesses, he says, with a car repair chain and electrical appliances producer two of the ways he is trying to make the most of domestic consumption growth.
JPMorgan Chinese investment trust manager Howard Wang is buoyant about the central bank’s ability to push markets, as they have in developed nations.
The £140.5m trust is trading at a 12 per cent discount to net asset value – Fidelity Special Situations is at almost 14 per cent – which shows the cautious investor sentiment to Chinese assets.
However, central banks have been able to boost sentiment before and China is now embarking on a similar path, Wang says.
“We believe the market will continue to re-rate as the macroeconomic environment stabilises and as there is further evidence of structural reform being carried out,” he explains.
Blackfriars head of equities Tony Hann says the MSCI China index is likely to struggle over the next few years because it is heavily skewed toward financials and telecommunications firms.
Of the headline index, 40 per cent consists of financials – banks alone make up 23 per cent of the total – while telcos make up 12 per cent and energy 10 per cent.
The boutique emerging markets manager has been underweight financials.
Hann says: “We would not be particularly keen to own shares in Chinese banks or property companies, generally speaking. But we’re a stock-picking house in an economy and market as big as China – and it is still growing – so we have to think there are still opportunities at a company level where we can find things that are attractive.
“China is a great example – but not the only one – where the economic performance of particular periods does not correlate with the stock market’s performance.”
For most of the 2000s China’s GDP grew between 10 and 12 per cent, yet the stock market’s performance has been decidedly mixed.
“It’s a difficult time for the Chinese economy on a macro front,” he says. “We’ve been saying for some time that the Chinese growth rate has peaked; it will never again grow above 8 per cent, but that’s not a bad thing.
“We would be more worried if the GDP growth numbers start accelerating again.
“To sustain that growth, China was needing to build more and more and invest so much.”
He believes the government is committed to the consumption transition which bodes well for many of China’s new guard of the stock market.
Many state-owned enterprises – especially banks – are likely to be hammered by a move to completely market-based prices, he says.
Fidelity’s Nicholls agrees, and is steering clear of most banks and SOEs.
He does own shares in a railway company running a commuter service that has not had a rise in ticket prices since 1996, which is an example of how he is trying to profit from the creation of more efficient consumer markets.
“There’s plenty of potential for them to get more tariff hikes in a more market-based price setting environment.”
Hann says despite the boost to consumption, conspicuous consumption is in the doldrums, owing to the government crackdown on corruption and graft. That has hit gaming stocks as well, including a small Cambodian casino the fund holds.
“We see the Chinese government’s central goal is to stay in power. So that means full employment – the creation of a certain million jobs each year – to keep people’s lifestyles improving and make them more likely to live with a one-party system.”
Meanwhile, they have to support the renminbi to prevent a run on the currency that could create a 1990s style crash as US-denominated debt soars compared to local currency.
In doing so that will punish exporters, he notes, which conflicts with the first goal.
“I don’t envy them. It’s a super tanker of an economy which they have to steer very nimbly through a very difficult environment. Not an easy task.”