January 2020

China: Resilient Despite Challenges

In this video, China Equities Portfolio Manager May Ling Wee shares the reasons why despite a slowing economy, geopolitical adversity and ratcheting down of global growth expectations, there is evidence that China can weather the turmoil.

Key Takeaways

  • China remains resilient because it has a huge domestic market, is a major global exporter and is investing and manufacturing in other emerging markets.
  • The trade war is also about technological supremacy; therefore, China is quickly moving to become self-reliant, especially in technology.
  • While the strength of the consumer base in China remains the main investment thesis, there are also emerging opportunities in areas such as industrial automation, AI and robotics.
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How has trade friction impacted Chinese businesses?

May Ling Wee: First and foremost, [the] most direct impact that we’ve seen is actually [on] the domestic businessman and also the foreign investors’ confidence in China – that’s currently quite low. That also impacts manufacturing investment; we’ve seen manufacturing investment in the electronics and light industries in China … they’ve come to almost a standstill because confidence levels are low among the business people in China.

This won’t continue because the manufacturing relocation started in China, even before the trade war started, and if anything, this accelerates the manufacturing relocation.

In terms of what China will do because of economic friction with the U.S. is to try to ensure that it is able to be self-sufficient and self-reliant in a lot of what it needs in the supply chain, especially in the technology sector. Because this trade war is not just about trade and tariffs, but it’s also a war on technological supremacy between the U.S. and China.

So we expect China to support its domestic companies to try to “onshore” as much as possible in terms of its supply chain and to continue to support research and development in many of the technology sectors in China.

Why do you think China will remain resilient despite the challenges it faces?

We see relative resilience in the Chinese economy. The trade numbers … we’ve had more than one year of tariffs on U.S. merchandise imports from China, but trade numbers are actually flat, rather than down, so far this year. A lot of that is because China has a big domestic market where manufacturing is in China, not just for the U.S. market but also for its own domestic growing demand and also for global demand and not just U.S. demand.

That’s why we think there’s been some resilience in the manufacturing industry in China. It is weak, but the trade numbers haven’t actually fallen off the cliff. The corporate sector in China remains relatively resilient, especially amongst the leading companies in China is because of the big home market, domestic demand in this market, where the consumer remains relatively stable, consumption remains relatively stable … these companies have a big domestic market to build scale.

And what they’re doing right now is actually to take their businesses overseas in emerging markets like India and Vietnam. So these companies continue to do relatively well with the scale that they’ve built at home. They’re now exporting that to markets and economies in the region as well.

What are the emerging opportunities for investors looking to access the China market?

In our view, the opportunities for investors looking to access the China market remain the same as what we’ve said for the past several years. The domestic consumer market is a large, relatively fast-growing market. In some ways, it’s also underdeveloped and the corporates and the companies who can supply the right products and services into this market continue to do well.

We also see opportunities in the technology innovators in the Chinese market. These companies have a lot of scale, they have a big consumer base where they’ve actually grown over the past several years, over the past decade, meeting the needs of the Chinese consumer in China.

They are now actually building an adjacent market for themselves in the business and corporate sector in the field of industrial automation, in artificial intelligence, and in robotics as well. So we continue to see opportunities in this sector. We also like the service sectors in China, where we believe the aging population also drives that demand for financial products such as life insurance.

That market right now is underpenetrated, and as we believe with growing wealth and assets to protect, the Chinese consumer will actually look more and more at the protection gap for themselves.

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