China, the global economic powerhouse, faces a complex landscape of shifting consumer behaviours, regional differences and changing global trade dynamics. The aftermath of long and unpredictable Covid lockdowns has impacted consumer confidence, boosting saving and curtailing spending – with the exception of the luxury end of the market. While there are complex economic and market dynamics at work in China, there are also a number of opportunities for the savvy investor.
Current shifts in the market
Regional variations complicate China’s economic outlook. In the north, Beijing’s focus is on political stability and concerns about how the government will navigate the economy during the current turbulence. Shanghai, located in the middle of the country, is concerned with the debt crisis, particularly in the property sector. Whereas Shenzhen, in the south, remains optimistic, particularly about the prospects for the tech sector led by companies like electric vehicle manufacturer, BYD, and technology and communication company, Tencent.
Shifts can be seen in China’s export strategy with a focus away from traditional US and European markets to the “Global South”. This area is home to Brazil, India, Pakistan, Indonesia and China, which, along with Nigeria and Mexico, are the largest countries in terms of land area and population.
As part of these global trading shifts, Mexico recently surpassed China as the largest exporter to the US. Off the back of the shipping issues experienced during Covid, and ongoing geopolitical tensions, many Chinese manufacturers are taking a nearshoring strategy and moving production facilities to Mexico. Among those making this move are Foxconn, the world’s largest contract electronics manufacturer.
Despite cautious forecasts, China’s economy is expected to achieve a commendable 4.5 – 5% growth next year. There are also high expectations for a government-backed fiscal stimulus to revitalize construction and urban renewal, estimated initially at RMB1 trillion. This strategic recovery approach aims to avoid inflation risks and capital wastage, promoting a more sustained economic revival.
Evaluating current opportunities
Contrary to expectations, China’s stock market failed to surge post-Covid, resulting in historically low Price-Earnings (PE) ratios at around 15 times earnings in the A-share market. For some this may look like a significant opportunity for long-term investors, however, conventional A-share market investments are unlikely to yield the high returns that can be achieved elsewhere. Instead, certain sectors and stocks offer strong opportunities.
- In the area of domestic tourism, hotel bookings and occupancy rates across the country have rebounded to pre-Covid levels, and many Shanghai-based chains in the food and dining area are reporting strong growth.
- While BYD is the poster child for China’s growing EV sector, there are a number of other profitable players in this market, such as Nio, Li Auto, and Xpeng. With BYD manufacturing 1.5 million EV’s in the six months to July and a strong domestic market, BYD and China’s other EV manufacturers are turning their attention to growth markets in the Global South, including the Middle East, South America and Eastern Europe.
- Along with the rise in EVs and electronics, the supply chain component manufacturers, including Huana Neo, Huile Tech, and Beite Tech. These companies supply the battery components, wheel technology and engine circuits, and have the potential to provide high returns to investors.
While these companies and sectors represent opportunities, it’s crucial to conduct thorough due diligence before making an investment decision. The dynamic nature of the China market, requires an informed approach. Successfully navigating the challenges and making strategic investments can yield substantial benefits for investors.