Expect China's economy to keep on growing

published 8 March 2019

China's main equity market index, the CSI 300, slumped by more than a quarter in 2018. But this year it has come roaring back, gaining 25% and outstripping its major rivals. Ongoing trade talks with the US, which have been "very productive", according to Donald Trump, have been a key driver of the rally. And last week there was more good news for the bulls.

Leading equity-index provider MSCI has announced that it is going to integrate more of China's domestic stocks into its indices. The so called A-shares would then account for more than 16% of the MSCI Emerging Markets index (which already has a third of its assets in China). Tracker funds following this index would automatically buy the new shares once they're included in November. This could see $125bn flowing into the country's equities this year.

Boosting the economy

All these policies are designed to prevent the recent downturn worsening; last year the economy grew by 6.6%, the lowest growth rate since 1990. Beijing is constrained by a huge debt pile, so it can't stimulate nearly as powerfully as it did when the West collapsed into the financial crisis a decade ago. Expect a pick up in credit growth from an annual rate of 10% to 12%-13%, say Andrew Batson and Chen Long in a Gavekal Research note: nothing spectacular, but enough to put a floor under growth.

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Meanwhile, investors "taking a long view" will want to take advantage of historically low valuations, says Fabiana Fedeli in the FT. The outlook remains compelling. "At its current size, 6% growth in China's economy adds the GDP equivalent of another Switzerland each year," Edmund Harriss, manager of the Guinness Best of China Fund, toldThe Sunday Times. "If we were to assume that China's GDP grew by 6% this year, 5% next year, 4% the year after... then in five years' time, in GDP terms, China will still have added another India."

China has more millionaires and billionaires than any country save theUS. It has a growing middle class, andit is gradually shifting from being a manufacturing-orientated economy to becoming a consumption-driven one.

Investors could consider two investment trusts that focus largely on the long-term growth of consumption: the JPMorgan Chinese Investment (LSE: JMC)and the Fidelity Special Situations (LSE: FCSS) trusts. They are on respective discounts to net asset value of 11% and 8%.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..