Structural reforms to drive Chinese growth

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Laura Luo, manager of the Baring Hong Kong China Fund and head of Hong Kong China Equities comments on the impact of structural reforms on Chinese investment opportunities.

Structural reforms in China are having a tangible, positive impact on the country’s financial sector and, together with the development of a much more consumer-driven economy, will support strong market growth and investment opportunities, according to Baring Asset Management (“Barings”). Firms well placed to capitalise include local internet companies, life insurers, pharmaceutical companies and some car manufacturers.

Recent market liberalisation programmes such as Hong Kong-Shanghai Stock Connect and the Renminbi Qualified Foreign Institutional Investor programme are a clear indication of China opening up to both domestic and international investors. In terms of the wider economy, Government fiscal and monetary reforms are focused on generating long-term sustainable growth and we are confident that these steps will be successful in creating a more stable, positive environment for investors.

There is also a clear trend towards consumption and this has led to the identification of some strong opportunities. For instance, the size of the e-commerce market in China has already surpassed that of the US and Europe combined while the penetration rate of e-commerce sales in China will match that of the US in 2015. In this context, domestic brands such as Tencent, and Baidu, which is seen as the ‘Google of China’, are very well placed in our view and represent key holdings in our fund.

While non-bank financials are particularly well placed to benefit from the evolution of the Chinese economy, firms taking a lead in more consumer-focused sectors also represent attractive opportunities. Some car manufacturers are proving to be strengthening consumer brands and have the potential to expand outside of its domestic market, believes Barings. Some firms have begun producing higher end vehicles to cater for demand from China’s more affluent consumers and to compete head-on with Western brands.

It is important to understand the range and size of market developments taking place in China. The establishment of three national, major economic development zones will also bolster economic growth in China, for instance. The Beijing-Tianjin-Hebei zone, the Yangtze River region, and the ‘One Belt, One Road’ initiative, which is focused in particular on developing relationships across Asia, will catalyse growth across a range of sectors – from infrastructure to manufacturing, construction and retail – and complement Government policies aimed at generating sustainable growth.

In our view, China stands out as an attractive market from a price/earnings, price/book versus return on equity perspective. Market liberalisations such as Stock Connect will have a material impact on equity market development and demand for equity assets. As the full impact of reforms start to be felt more significantly we see that from this position, China currently looks very good value – in terms of the price to earnings ratio, the MSCI China index is trading far below markets such as Japan, India, the UK and Europe, and on a long-term view we expect a significant re-rating.

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