Once hailed as a global market leader, China has fallen short of investor expectations in recent years with lackluster equity returns. Yet, as stimulus measures take effect and shareholder returns improve, a pressing question emerges: Is it time for investors to rethink their stance on China?
This question is particularly relevant given the backdrop of recent market movements. Until the September 2024 rally, which saw markets rise by around 30%, China's stock markets had been underperforming. Between August 2021 and August 2024, the MSCI China index declined by 35.5%, while the MSCI ACWI gained 18.4%. This underperformance reflected efforts to address a property bubble, escalating geopolitical tensions with the U.S. and its allies, and investor concerns over government crackdowns on sectors like tech and education, compounded by strict COVID-19 measures.
The government initially implemented a series of primarily monetary measures aimed at boosting growth. However, these early efforts failed to inspire investor confidence. By late 2024, the policy approach evolved into a more balanced mix of monetary and fiscal measures. A fiscal package was introduced to stabilize local governments under financial strain and to support broader economic recovery efforts, marking a more decisive shift in strategy.
While these measures signal stronger government support for risk assets and aim to mitigate deflation risks, they reflect China’s measured, long-term approach to economic stability. The markets were initially delighted, and the rally in September, which saw the MSCI China index recover from a decade-low price-to-earnings of 10x to 12.3x, indicated that investor sentiment had possibly bottomed out. However, the question remains: was this a temporary adjustment or a turning point for China’s economic prospects?
Policy shifts
China is undergoing a profound economic transformation, shifting from an investment-driven model to a "dual circulation" strategy. This approach emphasizes strengthening domestic production and consumption while maintaining international trade ties. Central to this shift is the government’s focus on technological advancement and high-end manufacturing, aiming to reduce reliance on traditional growth drivers such as property and infrastructure.
In line with this shift, recent policies reflect a preference for structural reforms over short-term market stimulation. Reserve ratio cuts have been introduced to enhance liquidity, with the objective of directing capital towards productive investments rather than fueling consumer debt. Similarly, property sector stimulus measures aim to clear excess supply and restore balance, rather than artificially boosting demand for speculative purposes.
Despite the challenges, rising incomes and urbanization position consumption as a key potential growth driver. However, for this potential to be fully realized, the government will need to prioritize improvements in social security, healthcare, and education. Strengthening these areas is essential to boosting consumer confidence, reducing precautionary savings, and unlocking the full potential of domestic consumption.
Geopolitical and global trade dynamics
China’s economic transformation is unfolding against the backdrop of increasingly contentious relations with the U.S., particularly after its “Made in China 2025” strategy, which aims to make China a global leader in critical industries. These ambitions have intensified tensions, with the U.S. imposing tariffs on Chinese goods. As the global power structure shifts from unipolarity to multipolarity, these geopolitical tensions continue to be an area of concern for investors.
Nevertheless, fears that global supply-chain shifts — onshoring, nearshoring and friendshoring — might marginalize China have proven overstated. Its trade surplus and role in complex value chains have grown, while Chinese manufacturers have strategically invested in regions like Southeast Asia and Turkey to maintain their integration into global trade networks. Notably, China's exports to the U.S. now account for just 14% of its total exports, down by more than 25% over the past decade. In the eight years it has had to adapt to a change in U.S. policy, China has been working steadily to diversify its trading relationships. Instead of fixating on events in Washington D.C., investors would do well to focus on China’s domestic economic policy.
China’s transformation driving investment potential
Meanwhile, Chinese companies are moving from a “growth-at-all-costs” phase toward a focus on profitability and shareholder returns. This shift is supported by policy changes, including reforms by the China Securities Regulatory Commission and new performance metrics for state-owned enterprises. Reflecting this broader trend, 2022 and 2023 saw record share buybacks and a near-tripling of dividend payouts. For instance, Alibaba and Tencent have increased share buybacks and dividend payouts, signaling more disciplined capital allocation and a stronger focus on delivering value to shareholders.
This focus on shareholder returns is set against substantial investment opportunities. With over 5,000 companies listed on domestic Chinese exchanges and another 2,000 in Hong Kong, China offers a vast, underrepresented market in global equity indexes. While macroeconomic concerns persist, there is a compelling case for selective, bottom-up stock picking. Rapid growth in the industrial, technology, and consumer sectors provides meaningful diversification opportunities for investors.
Several of China’s sectors also present attractive long-term growth prospects. In decarbonization, China is the largest emitter of greenhouse gases but is also a leader in solar power, electric vehicles, and battery production, making these industries critical to global sustainability efforts. China’s auto industry, particularly its electric vehicles, is on track to become a global success story.
China’s aging population further drives demand in healthcare, creating opportunities in healthcare infrastructure and insurance, among others. The retail landscape is also evolving, with new digital formats like live streaming reshaping consumer shopping habits.
Bottom-up approach to tap into investment opportunities in China
While China’s stock markets are gaining momentum, the more pressing question pertains to the sustainability of this rally. Ongoing reforms and growing shareholder returns highlight the potential of China’s economic transformation to deliver compelling long-term investment opportunities. Despite geopolitical tensions, China’s growing influence in global trade, technological innovation and its shift towards high-end manufacturing present significant prospects for investors who adopt a selective, bottom-up approach to investing.
Investors need to understand China's unique governance model and long-term strategies, which prioritize stability and sustainable growth over immediate market gains. A nuanced approach, supported by thorough fundamental research, can uncover opportunities that may otherwise be missed.
Wenchang Ma and Joanna Yang are co- all-China equity portfolio managers at Ninety One, based in Hong Kong. Philip Saunders, investment institute director at Ninety One, is based in London. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
