Major Investment Trends in China
By Line Heidenheim Juul
In 2020, Chinese listings were among the top 10 globally, and the boom in Chinese IPO’s is expected to continue in 2021. There is a huge demand from both institutional and retail investors, as more and more companies in new tech is seeking to be listed.
But Chinese companies exist in a market where certain factors are not as predictable as in Western markets, and there is an important need to keep up to date with central government policies and trends in the market.
In conversation with Head of Wealth Management Saxo Markets Hong Kong, Lester Chan, we look at some of the key trends to pay attention to, when looking at the China market.
Growth Centre of China: The Greater Bay Area
One key area to watch is what is called The Greater Bay Area, which covers Hong Kong, Macau, Shenzhen and some of the surrounding cities. While smaller in size it currently makes up approximately a third of the economic output in China and an impressive 50% of the entire country´s patent applications. The three key cities here are Shenzhen, popularly known as the “Silicon Valley of China”, Guangzhou “the factory of the world” and of course Hong Kong, a major financial centre. Some of the main companies headquartered there are Huawei, Tencent and Ping An Group – the largest insurer in China.
“For those interested in fast growing domestic companies, The Greater Bay area cannot be ignored due to its very unique make-up as a growth centre of China and a major industrial cluster focusing on scientific development. Furthermore, it is the wealthiest urban cluster in China, and the consumer market could grow to 900 billion USD. It has the potential to become the 9th biggest economy in the world by 2025,” Chan says
ESG and potential in the green revolution
While China is the largest C02-emitter in the world, the recent five-year plan has made it clear that China will need massive investments in the green transition. Sectors like New Energy Vehicles (NEV) has been exploding over the past 10 years, and China has several NEV-companies listed in NYSE. China has already turned investments in this area to focus on infrastructure such as charging stations, and cities like Shenzhen hold the record for having the biggest e-bus fleet in the world.
Other areas where we expect to see investments are solar, wind and nuclear. The significant position of the green transition in the five-year plan is a clear signal, and there is thus a rising interest in ESG (Environmental, Societal and Governance) stocks.
“Over the past few years there has been a tremendous increase in interest of ESG stocks, but there is still a long way to go in China, because many companies are not yet collecting data or implementing the right oversight of this. A key challenge is also to unify the current 9 guidelines. So, while this is an interesting area, Chinese companies are still behind in this,” Chan says.
Tech as the new infrastructure
Another key trend to keep an eye on in China is the development of the new infrastructure in tech. The Chinese government has released a plan to become world leading in artificial intelligence by 2030 and they are heavily investing in the roll out of 5G, which was sped up during Covid19. There is also an elaborate plan to transform China by 2025, and lift the entire supply chain. In this, Internet of Things (IoT) is a major priority that can increase efficiency for manufacture and logistics to mention a few sectors. Lastly, block chain has also become a national priority in China, as digitalization of cities and the financial infrastructure requires it.
“Overall, these technologies are a part of a greater objective to make infrastructure smarter via faster and more powerful data collection, massive computing power and analytical capabilities. While investments in traditional infrastructure is much bigger, for example in relation to the New Silk Route, the growth rate of investment in “new tech infrastructure” is much higher,” Chan says.
Domestic Consumption
Chan explains that China´s economy is already largely bourn by consumption, with over 70% of GDP growth over the past few years coming from final consumption expenditure. Adding to this, the number of households with no children living at home or other dependents is expected to increase to almost 70% in the next decade. This makes the Chinese consumption power a force to be reckoned with. As the pandemic unfolded last year and the China-US relationship has become increasingly strained, the Chinese government has started to further encourage domestic consumption. In the recent five-year plan, we see this in the policy guideline around the term “dual circulation economy”. That is why it is reasonable to assume that this is a measure that will continue, because it strengthens the self-reliance and stability of the Chinese economy.
Big tech is coming home
All of China´s big tech companies like Alibaba, Jd.com and Tencent are already listed overseas, but due to increasing tensions and fear of further regulatory oversight from the U.S, several of these companies have or seek dual listings in Hong Kong.
“We see companies like Baidu, the “Google of China” recently list back home, to gain more capital of course. But this is part of a recent homecoming trend,” Chan says.
A different market
“As an investor in Chinese stocks, you have to have deeper insights into the market, because there are many variables and the market runs differently with forces beyond the market. There are naturally key differences between the mainland exchanges, such as the Star market in Shanghai and the exchange in Hong Kong. There are also a lot more retail-investors with short-term view investing in Chinese stocks, and that affects the dynamic. So the key is to build conviction and market insight over time,” Chan says.
Disclaimer: The views expressed above are generalizations of the market and not meant as investment advice in any capacity.