China equities – what can we learn from the recent data

Not that long ago, we have seen the correction in the Chinese equity markets. It showed us, how uncertain the global recovery from the pandemic actually is. And amid the still ongoing transformation of the country’s economy, we are currently witnessing something that looks like it could support future investment opportunities.

Actually, China (which is currently the second-largest economy in the world) is the only major market in the world that somehow managed to grow in the troubled year of 2020. They were also the first ones to withdraw from the strictest pandemic regulations, and they tightened their monetary policy. All this combined resulted in the really sharp correction of the equity market, bringing antitrust investigations and higher commodity prices. With all that happening, the potential rewards have become more appealing, and the risks seem to be less frightening.

The approach is changing – China is changing too

China is currently making up an impressive 17% of the global Gross Domestic Product (GDP), which places it on the second position among the biggest economies on the planet. In the five years’ time, this could grow to as much as 20% of the GDP. At least that is the data presented by the IMF.

Although some may think that China is a lone wolf, the reality proves that hypothesis wrong. China currently is a partner to 130 regions and countries and is able to keep the growing trajectory. Year after year, the country transforms itself from the economy focused on manufacturing to an economy that is based strongly on the service industry. Only ten years ago, services made up 44.2 percent of the GDP of the country, while today it’s 54.5 percent. The accumulation of the wealth has also enabled the country to develop the largest (in the world) middle class, which therefore boosted the demand for services and goods. This was followed by meeting their needs such as financial product, health care, and even branded goods. So, if you are stuck to the views from years ago about China, it may be the last call to revisit them as they are probably outdated.

The ambitious plans with optimistic forecasts

The country itself seems really focused on making progress, and possibly overtaking the United States as the leading economy of the world. Its fourteenth FYP (Five-Year Plan) really aims for the prosperity of the country as well as reaching and maintaining the ‘high-income’ status. The World Bank defines this status as annual GNI per capita (Gross National Income) reaching US$12,700. Currently, China sits at US$10,500, and has already set the targets that are supposed to take them to the top tier of economies.

Officials believe that the 6% of annual GDP growth is easily obtainable, while the RBCs (Royal Bank of Canada) forecasts claim that it will be 9 percent in 2021 and 5.5 percent in the following year.

The FYP introduces an innovational approach to the development of the economy as a whole. The strategy of ‘dual-circulation’ aims to expand the demands in the home country, as well as drive the innovation. Should China succeed, they would limit their dependence from other markets, especially when it comes to trade and tech. Their plans exclude closing to the foreign investors, as well as cutting from the outside world.

The perfect example should be the case of 5G, as China really accelerated its development, the manufacturing of semiconductors, alongside with all the technologies needed for their economy to strive. They have also increased immensely their investments in development and research of the new innovations.

And surprisingly, China plans (and does big steps towards that) to make its economy green. Their plan calls for boosting their use of renewables (by as much as 40 percent by 2025) and limiting the coal-dependence. By 2025 one fifth of the cars is targeted to be electric, while today this rate is at 5 percent.

To read more about China’s developments, plans and prospects, use the following link and join Disruption Banking. There, you will find a fascinating piece by RBC’s Frédérique Carrier: