As rumblings of the Chinese stock-market collapse last June fade, investors in Canada may be breathing a sigh of relief that they can't invest in it – at least not yet.
That will change in time as the government moves to open up capital markets, and shares reserved for domestic investors – known as A shares – come to be included in global stock-market indexes.
The Shanghai composite index is clawing its way back, easing fears that the drop was a sign of looming economic woes. Chinese gross domestic product (GDP) slipped below the key 7-per-cent mark to 6.9 per cent in the third quarter, but the government says it is comfortable with the lower growth rate.
A peek behind the GDP number shows an economy shifting – successfully, albeit haltingly – from government investment in infrastructure and housing to one increasingly based on domestic consumption and services. The service sector grew by 8.6 per cent in the third quarter, up from 8.4 per cent in the first half.
Services and consumption now account for more than half of China's GDP.
"It's the world's best consumption story," says Andy Rothman, an investment strategist at Matthews Asia in San Francisco. Matthews is subadviser to the Bank of Montreal Asian Growth and Income Fund.
"The shift from an economy focused on exports and investment toward consumption is well under way," Mr. Rothman said in a telephone interview. Retail sales in September were up 10.9 per cent, for example, compared with a rise of just 2 per cent in the United States.
Catherine Yeung, investment director for Fidelity Worldwide Investment in Hong Kong, also thinks foreign investors tend to misunderstand the Chinese market.
"There's a fascination with the pace of GDP growth, but there's much more to the story," Ms. Yeung said. The Fidelity China Fund won a Lipper Fund Award in 2015 for its three- and five-year performance in the Greater China Equity category.
Mind you, growth is coming mainly from the young, relatively affluent, emerging middle class who live in major cities such as Beijing and Shanghai, she notes. They aspire to the same things that young, urban Canadians do: a home, an SUV, an iPhone, fancy sneakers and high-end coffee. Only about a third of the population is urbanized, Ms. Yeung says.
The case for China is persuasive. Not only is it the world's second-largest economy, it accounts for a third of global economic growth, more than the United States and Europe combined, Mr. Rothman says.
Given its growing clout, "every Canadian is going to be investing in China whether he knows it or not," he says. For Canadian miners, or U.S. auto and technology companies, "a significant share of their growth is coming from China." The trend may be slowing, but China still has the fastest growth rates in the world.
Economic statistics can be misleading, the analysts say. Sales of passenger cars are slowing, but if you dig a little deeper, it becomes apparent that the market is maturing, Mr. Rothman says. At the same time, a vibrant used-car market is emerging for the first time, while higher-income people are trading up to SUVs.
Chinese consumers also are big savers, tucking away 25 per cent of their income, so the strong consumer growth story is not driven by people maxing out their credit cards, Mr. Rothman says.
Looking out longer term, Ms. Yeung points to the role of government in advancing the national economy. Beijing's strategy is "to climb up the value chain," encouraging research and development, technological innovation and corporate efficiency. Its goal is to become a global economic superpower.
Notable in this regard are the creation of the Asian Infrastructure Investment Bank and the "One Belt, One Road" initiative.
One Belt, One Road involves the creation of an economic land belt that includes countries on the original Silk Road route through Central Asia, West Asia, the Middle East and Europe, as well as a maritime road that links China's port facilities with the African coast, pushing up through the Suez Canal into the Mediterranean, according to Asian investment bank CLSA Ltd.
The project aims to redirect the country's domestic overcapacity and capital to regional infrastructure development, improving trade and relations with Association of Southeast Asian Nations (ASEAN) as well as Central Asian and European countries, the bank says.
"It's part of their overall plan of being a global superpower," Ms. Yeung says. The plan is that by 2049, "China will once again be the number one economic player in the world."
As for that up-and-down Shanghai stock market, dominated as it is by small investors, it does not reflect the underlying economy, Mr. Rothman says. Most of the companies listed in Shanghai are state-owned enterprises, "whereas all of the growth in the Chinese economy is coming from small, entrepreneurial private companies," he adds. "All of the new job creation in China is coming from private companies."
Five easy ways for investors to play the China story
- Shares of multinational companies whose products are “must haves” for the emerging urban middle class. Apple, for example, more than doubled its China sales over the past year thanks mainly to the iPhone.
- Shares of blue-chip Chinese companies interlisted as American Depository Receipts (ADRs) on the New York Stock Exchange.
- Country funds. Fidelity and Bank of Montreal are just two of the mutual fund firms that offer China shares. Many have quite respectable three-, five- and even 10-year returns. But country funds can be risky, says Dan Hallett, a principal at HighView Financial Group. “The rise of an economic power takes decades to play out fully,” Mr. Hallett said. “Stock market activity over that time has a lot of fits and starts.”
- Regional funds, such as BMO’s Asian Growth and Income Fund, emerging market funds or, better still, Mr. Hallett says, global funds.
- Exchange-traded funds. Given the market’s volatility, ETFs may not be the best way to play the China story. BMO has a China Equity ETF that invests in ADRs listed in New York and traded in U.S. dollars. Also on New York is the Global X China Consumer ETF. Fund giant Vanguard plans to gradually include China A shares in its Vanguard Emerging Markets Stock Index Fund, a version of which will be available in Canada.