For all its dangers, there’s still considerable opportunity to be found in the Chinese investment space.
At the 2021 Global Investment Conference, Anh Lu, portfolio manager for the Asia ex-Japan equity strategy at T. Rowe Price, said the trick to capitalizing on the opportunities in the world’s most populous country is to consider the long-term direction of a number of key trends. She highlighted China’s diverse spectrum of equity options, its commitment to reducing its carbon footprint and its often overlooked culture of innovation.
“We think what is actually exciting about China is the opportunity set itself. It is very deep. It has great breadth and there are many good businesses to invest in.”
As of 2020, China has more than 5,000 listed companies — more than the U.S. Since 2015, while American businesses have been in the midst of a consolidation trend, the number of Chinese businesses has expanded by about 40 per cent. “Investors can always find idiosyncratic opportunities,” said Lu. “It is a great way to generate alpha without having to focus too much on macro risks.”
It isn’t just the scale of China’s engagement in the market economy that has Lu convinced of its worth to investors — she’s convinced that the Chinese people have the innovative spirit needed to support its dynamic economy.
In the past three decades, China’s per capita gross domestic product has expanded more than 10 times over — a feat Lu described as “historically unprecedented.” There’s also an enormous amount of domestic talent, she noted. “China generates the most science and engineering graduates in the world.”
While there are advantages to this diversity and innovation, Lu said they also present challenges. “Navigating China’s 5,200 businesses that are listed, it can be quite confusing. The diversity is great ,but it can make it very difficult to identify winners and losers.”
One area that presents an exciting opportunity to institutional investors relates to the country’s commitment to reaching carbon by 2060. According to some analysts’ research, China will have to invest some US$16 trillion in order to reach its carbon reduction targets set for the year 2060. In Lu’s mind, it seems clear that much of this investment will be front-loaded with the support of the country’s capital markets.
“The imperative and sense of urgency is great in China at the moment. The implication for investors is that businesses in everything from renewable power and transport, such as electric vehicles or companies in the EV supply chain, to companies that supply industrial technology and companies that provide software for energy efficiency, will benefit from this great investment in helping to improve the environment.”
Of course, beyond government spending, China’s economic ecosystem will also benefit from the growing wealth of its gargantuan domestic market. One group that’s often overlooked is the 35 million households with two incomes and no children.
“As we’ve learned from other economies, these households have a lot of spending power,” said Lu. “The implication for bottom-up investors is that you should focus on companies that offer a compelling value proposition for Chinese consumers.”