Expect China’s economy to keep on growing

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

The Chinese government has also returned to stimulating the economy, which bodes well for earnings and equities. “Beijing’s injection of liquidity into the financial system is once more pimping up share prices,” says Michael Mackenzie in the Financial Times. And this week Beijing announced further measures to boost growth. Its annual work report highlighted business tax and fee cuts totalling nearly ¥2trn ($298bn) for 2019. Beijing has also announced a cut in value added tax (VAT), which should benefit the manufacturing sector, according to Bloomberg.

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.

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, told The 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 the US. It has a growing middle class, and it 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: JMCand the Fidelity Special Situations (LSE: FCSS) trusts. They are on respective discounts to net asset value of 11% and 8%.