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China’s shaky economy appears to be stabilizing, but investors remain cautious about its struggling property sector and weak global demand for its manufactured goods.
For some, China’s economic setback is an opportunity to buy into the world’s second-largest economy at cheaper valuations.
“There is great skepticism out there ... [but] I don’t think China is broken,” says Arup Datta, senior vice president and head of global quantitative equity at Mackenzie Investments in Boston.
China’s National Bureau of Statistics recently reported better-than-expected retail sales and industrial production for August. Industrial output rose 4.5 per cent from a year earlier, beating forecasts for a 3.9-per-cent increase based on a Reuters poll of analysts. Retail sales rose 4.6 per cent in August, above an expected 3-per-cent rise.
The data suggest Beijing’s policy measures to kickstart its economy are starting to work. Still, a cash crunch in the country’s property sector continues to weigh on growth while demand for goods produced by the “world’s factory” remains sluggish. Exports fell 8.8 per cent in August compared with a year earlier, while imports contracted 7.3 per cent – although both are less than forecast.
China’s foreign ministry recently rejected claims from Western leaders that its economy is in crisis. Meanwhile, investors are watching closely with mixed reactions on how to play the volatility.
‘A contrarian value call’
Mr. Datta is sticking with Chinese investments in his portfolios as a “contrarian value call.”
He describes the Chinese government as “pragmatic” in decisions about the economy but says its measures to correct problems – such as removing the restrictive zero-COVID-19 policy – often happen more slowly than North American investors are used to.
“Markets got too excited last year and are giving back this year,” he says.
The CSI 300, which tracks the biggest companies listed in Shanghai and Shenzhen, is down 5.1 per cent over the past 12 months, while the SSE Composite Index, which tracks stocks traded on the Shanghai Stock Exchange, is flat.
Mr. Datta says China is taking steps to boost its economy by lowering interest rates, and it appears to be easing up on private sector regulations, including cracking down on the country’s big tech firms that led to a slump in the sector.
“I’m more of a believer in China than many investors are right now because of its strong capabilities,” he says.
And while China may not experience the same double-digit economic growth it has in recent decades, Mr. Datta believes the country remains a good long-term investment.
“I think China will hold its own,” he adds.
Moving money elsewhere for now
Not all portfolio managers are keen to stay invested in China.
David Wallin, portfolio manager at Harbourfront Wealth Management Inc. in Vancouver, says his firm exited investments in the country in the first quarter of this year after data signalled a weakening economy.
“China is still trying to stickhandle its economy, so we decided to eliminate our exposure,” he says, noting its investments were largely through more liquid exchange-traded funds.
Instead, Mr. Wallin says his investment team has decided to expand its international exposure to countries such as Japan and India, where the economies show more strength.
“There could be a re-entry [in China] at some point … if the data improve,” he says.
China in a broader strategy
Sadiq Adatia, chief investment officer at BMO Global Asset Management in Toronto, sees opportunities in China as part of a broader, longer-term investment in emerging markets.
“There is upside in China, especially given how much negativity there is around it right now,” he says.
While China has had some positive economic data throughout the year including in August, he notes it hasn’t been consistent.
“The property drag remains, which will impact the shorter-term outlook,” Mr. Adatia says.
“[Investors] need to distinguish between the short and long term here,” he adds. “Short term, there’s a lot of noise and risk. Long term, I think you see a lot of opportunities. But you have to be patient and understand the risks.”
He expects Chinese officials to roll out more policy measures in the weeks and months ahead to help the economy recover.
“China isn’t going to let its economy falter,” Mr. Adatia adds.
Investors who want to be in China need to understand its economic, political and regulatory risks, he says. He believes China should be part of a broadly diversified portfolio given its global economic clout.
“If you think about the underlying economics of China’s population and where the economy is growing in the future, it’s hard to say you shouldn’t be investing in this market,” he says. “There’s a big opportunity you’d be missing out on if you didn’t.”
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