Is it worth sticking with China?

To say China’s stock market has disappointed this year is something of an understatement. While India – China’s great growth rival – has seen its stock market forge ahead to new record highs, China’s stock market has flatlined since the spring.

Meanwhile, China’s economy has slowed as high commodity prices, chip shortages, a slump in the property market, widespread floods and a partial port shutdown have combined to depress activity.

The debt crisis at China Evergrande, the country’s second-largest property developer, may have kept many investors on the sidelines. Markets now track the company’s upcoming bond interest payments in a similar fashion to traders in the fallout of the US subprime mortgages crisis.

Recent regulatory changes affecting the technology sector including the introduction of stringent limits on video gaming for minors have also weighed on sentiment. They’ve fuelled fears that government interventions will ultimately stifle innovation and depress growth.

However, there is now hope at least that tripwires like these turn out to be no more than sideshows to the main event – the growth currently being achieved by the economy and the growth yet to come.   

A prominent former member of the monetary policy committee of the PBOC said in an interview with Bloomberg TV yesterday that, while the economy may slow further in the short term, we will see average growth of around 8% this year.1 That compares well with an official government target of growth of over 6%.

The Evergrande crisis remains a risk to the broader picture, but its ability to deliver a black swan event now appears to be diminishing. The government, forewarned and with vast resources, will be primed for a managed as opposed to catastrophic contraction of overblown parts of the property sector, even as it seeks to redirect borrowing to targeted areas such as technology.

Latest reports suggest China Evergrande’s impressive delivery of 184 development projects in the third quarter demonstrates the company has healthy levels of working capital and cash flows2

The flip side to the disappointing progress of Chinese stocks this year is that relative valuations have fallen into pessimistic territory. For example, China’s stock market trades on just 13 times the earnings companies are expected to make over the next year compared with 21 times for North America3. Undoubtedly, China now looks very good value from a price versus economic growth perspective.


1 Bloomberg TV, 02.11.21
2 Bloomberg, 03.11.21
3 MSCI, 30.09.21
4 Stewart Investors, 30.09.21