Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 543

China is primed for a comeback

Our investment philosophy is to buy champion businesses of the future when valuations are depressed. Typically, reasons for the negativity are obvious. Our job as long-term investors is to look past short-term disruptions, and determine if the businesses possess strong economic moat which enable them to become champion companies in the future.

From this perspective, Chinese equities are exciting for us. After a three-year bear market, Chinese equites are well-and-truly out of favour. While the Chinese economy is facing multiple headwinds, quality businesses will continue to grow and become champion businesses in coming years. Right now is an opportunity to invest and take advantage of the attractive valuations.

The challenges

The economic headwinds for China are well-understood. The economy is reducing its reliance on the property sector for growth. It also has to cope with heightened geopolitical pressure and has spent the last few years purposefully reforming the economy.

All these negative factors are reversing to a certain extent for the better. However, it will take time for these measures to take hold and for the various sectors of the economy to heal. We believe that a muddling-through outlook is unfolding, with a generally stable and improving growth environment.

In the meantime, we are focussed on strong businesses with solid positions within the country that are still enjoying long term growth. Businesses like Tencent, Tencent Music or Kuaishou, all of which have an abundance of levers to pull by virtue of their dominance in the internet to maintain decent growth rates even in a slower economy.

Let’s go through a few of the issues that has worried investors.

1. The property sector

The much talked about property downturn is in fact quite advanced. Sales volumes of new residential properties are down 35-40% from peak sales a few years ago. With loosening of property policies, sales volumes are stabilising. Going forward, given the current backdrop, further decline in volumes is going to have smaller incremental impact on economic activities. According to Morgan Stanley Research, given the significant decline in activities, property investment in China as a percentage of GDP is already lower than that of Korea, Germany and Japan.


Source: NBS, Morgan Stanley Estimates


Source: NBS, Morgan Stanley estimates.

2. Hidden local Government debt

Another risk to the economy is the 'hidden debt' of the local Governments (also known as local government funding vehicles). Estimates have it totalling US$7 trillion (around 50% of China’s economy). While not a small sum, it is manageable, and the magnitude is well-understood by investors and regulators. The regulators are pursuing a combination of austerity, debt restructuring, assumption of debt by the central government and potentially money printing to tackle the problem. These initiatives should gradually work down the problem over time.

3. Government crackdowns on certain private sectors

Well-known examples of crackdown were on the after-school tuition sector and the internet sector. Firm rules were implemented to curb some of the activities that were deemed dysfunctional by the authorities.

The vibrant private sector has to shoulder the burden of economic growth under guardrails, and the Central Government has little appetite to introduce more tightening measures. The most recent episode involved a Government department official having to step down after releasing a consultation paper on additional tightening measures for the video gaming industry.


Source: SCMP

4. Money printing?

China’s version of “money printing” is called pledged supplementary lending (PSL). If the magnitude is eventually bigger than investors’ expectations, this will be a meaningful impetus for economic growth and cleaning up of the banking system.

5. Geopolitical Tension

Geopolitics tension is thawing. The meeting between President Biden and Xi shows the intention from both sides to restore bilateral relations and reducing near-term risk of escalatory confrontation. With the economy a top priority, China is adopting a pragmatic approach to dealing with geopolitical questions.

It is likely that continued technological competition will remain. Nevertheless, its manufacturing base remains second-to-none and cost-competitive, China will remain a key part of the global supply chain. New industries such as electric vehicles, renewable energy and automobile have become new drivers for export. China is diversifying exports towards the BRICS countries of the global south and remains the biggest exporter in the world.


Source: NBS, Morgan Stanley Estimates


Source: NBS, Morgan Stanley Estimates

Negatives seem priced in

The problems facing the Chinese economy are manageable. The bright spots are the huge domestic market that continues to grow. Indeed, real income for the consumers is growing, but with the weakness of consumer confidence, excess savings have built up. Improvement in confidence can quickly re-ignite consumer spending. Valuations have come down and are cheap on a historical and global basis. 


Source: Bloomberg

 

Dr Joseph Lai is Founder and Chief Investment Officer of Ox Capital Management (ABN 60 648 887 914, AFSL 533828).  This document does not relate to any financial or investment product or service and does not constitute or form part of any offer to sell, or any solicitation of any offer to subscribe for interests, and the information provided is intended to be general in nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs.

 

  •   17 January 2024
  • 6
  •      
  •   
6 Comments
CC
January 18, 2024

It's impossible to know if Chinese companies are great or cheap when the CCP refuses to allow transparency in accounting and auditing, supposedly because of national security.

Peter
January 19, 2024

With China's autocratic government seeking strong control of the economy, anti-western sentiments, threatening war over Taiwan/South China Sea and accused of lacking transiency about it's economy, you would have to be a fool or very brave to invest there in my humble opinion..

Allan
January 19, 2024

Which country wistful of wonted worth doesn't seek strong control of its economy, Peter? Regarding 'lack of transparency', it may have benefitted Philip Lowe, and myriad others besides, had Philip not been so forthcoming with his: 'No interest rate rises until 2024'.

Peter
January 20, 2024

Don't invest in autocratic communist countries. Their values are different to the western democracies .One should consider what happened to foreign investments when Russia invaded Ukraine. Assets have been frozen, dividends not paid and investors/companies have incurred significant losses off capital. China is threatening to take Taiwan by force if necessary and this could happen soon. I would imagine a similar scenario for investors in China when that occurs. I think some investors significantly underestimate the dangers of investing autocratic communist countries.

Graeme
January 21, 2024

All replies I agree with, totally valid.

Kurt
January 22, 2024

G'day Peter, China could hardly be defined as a communist economy in my eyes.

 

Leave a Comment:

RELATED ARTICLES

How to find big winners in the energy transition

Which country will be the next China?

China’s new model is a plan for a hostile world

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.