The COVID-19 pandemic is far in the rear-view mirror for most of us. For Chinese businesses and consumers though, its economic aftereffects linger on.
Lockdowns in 2020 through to 2022 brought China’s era of rapid growth to a sudden, crashing end. This change has been aggravated by a fraught geopolitical context, which could get worse in a US election year.
This transition had been partly forecast and the government made some plans to manage its impact. Most notably, the “Made in China 2025” initiative sought self-sufficiency in future supply chains, like semiconductors. It also attempted to take heat out of the overinflated property market by reducing credit for weaker developers.
As time goes on, the worst-case scenarios – local government collapse or major defaults in the property sector – appear less likely.
Despite these efforts, the Chinese economy is struggling with overcapacity. This was demonstrated to me in a recent visit to China. Numbers were visibly down in restaurants and other public areas.
The government has overridden some of its own efforts by continuing to invest. It has encouraged large banks to fund infrastructure and manufacturing projects, despite demand being weak. Concurrently, the banks are seeing their net interest margins (the measure of how much profit banks make from “normal” activity”) fall.
Supply and demand will take some time to rebalance. As a result, the path to a new growth model looks bumpy.
At the time of our full-year results in November 2023, we announced a major restructuring of Henderson Far East Income Limited’s portfolio. We reduced the trust’s allocation to China in favour of the dividend paying regions of the future, such as India and Indonesia (which we discussed in our previous postcard).
My recent visit may have suggested that there was a long road ahead before China’s growth improves. However, the unique dynamics of its economy mean that there remain some compelling investment opportunities in the country.
Notably, some Chinese companies are among the region’s more reliable dividend payers. About 20% of the trust’s portfolio is currently (as at 30/04/2024) invested in Chinese stocks.
Further, we believe China’s growth transition could itself bring select opportunities to the table. We will keep a close eye and be prepared to invest when and if they emerge.
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