Is China Still a Viable Investment Destination?

Amid inflationary challenges, geopolitical tensions, and global economic uncertainties, the question arises: Is China still a good investment? This topic was a focal point at the Milken Institute Asia Summit 2023 in Singapore on 13 September. Insights gleaned from the discussions painted a clearer picture of China’s future investment landscape.

China offers compelling investment opportunities rooted in its long-term development trajectory

In both the “Global Investment Outlook” and “China Investment Outlook” discussions, a consensus emerged: China is navigating a multifaceted set of challenges as it re-evaluates its historical economic model, seeking a fresh approach to ensure sustained growth and employment for the coming two decades. Positioned distinctly in a different economic cycle compared to the US and other developed nations, China’s strategy for the next decade is geared towards consumption-driven growth. Thus, the spotlight should be on opportunities aligned with this long-term trend.

Investment Opportunities in China:

1. Digitization: China’s digital evolution surpasses mere consumer-based digitization. It is unique in its integration with the supply chain, sparking innovation and enhancing productivity throughout its manufacturing ecosystem.
2. Sustainable Living: This is underscored by the comprehensive shift towards electric vehicles, covering everything from components to battery assemblies.
3. Healthcare: With an ageing population, there is a rising demand for healthcare services and technological innovations.
4. Consumer Sector: The future path of China’s consumer sector is marked by two significant shifts: the growing middle class and the changing shopping behaviors. More young generations take pride in China’s state-owned brands, shifting their purchasing choices to local brands. Furthermore, the way people receive information has transformed, leading to the rise of innovative businesses. It’s important to note that a significant portion of the world’s new middle-class shoppers will hail from Asia, with many from China. Even though fewer people from other countries have visited China in the last three years, businesses in the shopping sector have grown significantly.

The Chinese market stands out for its clear structural advantages, but understanding where to invest requires more detailed research

China boasts a robust pool of engineers, a productive and cohesive supply chain, and a vast domestic consumer base. This solid foundation provides an ideal environment for new technologies to develop and thrive locally.

The energy transition, rooted in sustainable development and complemented by cutting-edge technologies and innovative manufacturing, is a cornerstone of policy support. Several technological strategies are prominent, particularly advanced manufacturing techniques that support the global shift towards a greener economy.

As China’s economic focus shifts from sheer speed to quality-driven growth, transient speculative investments that were once “quick in, quick out” will diminish. Future investors will place an emphasis on thorough research to pinpoint enduring investment areas and opportunities.

China remains open for business; investors should adopt a ‘macro’ perspective

The pivotal challenges for future global economic development include the green transition and healthcare innovations. Geopolitical tensions risk driving inflation, resulting in escalating living costs. Addressing these challenges necessitates cost competitiveness across all sectors. The keys to business and economic triumph lie in efficiency and a cooperative market approach, attributes that are inherent in the Chinese market ecosystem.

On 14 May 2020, China’s Central Government introduced the “dual circulation” concept, emphasizing synergies between domestic and international businesses. While the terminology is new, it embodies China’s three-decade practice but with shifted industry focuses. For example, the semiconductor sector relies on domestic circulation, while sectors like the automotive industry demonstrate China’s transition from being a major car importer to the world’s leading exporter. This emphasizes that, while China is a vast market, it remains globally integrated and will never shut its doors to the world.

Current unfavorable factors suggested to be integrated in investment decision-making

1. Economy downturn: Although the third quarter macroeconomic data shows a moderating trend, it is undeniable that China’s economy is undergoing a cyclical adjustment. The adjustment originates in the dwindling real estate, one of the country’s pillar industries. The situation is expected to remain quo until a new economic growth point emerges.
2. Trade conflict with U.S.: China – U.S. trade fell by 14.5% in the first half of the year from a year ago, a direct consequence of U.S. moves to levy Section 301 tariffs on Chinese imports with about 10,000 categories of goods. Industries to some extent relying on export, for example, steel and aluminum industries will be affected.
3. Geopolitical risk: Close attention is recommended to be paid to China’s attitude in some of the regional conflicts around the world this year, although China has consistently called on the conflict parties to resolve disputes by calm, restrained and peaceful measures and avoided being involved in any dispute. However, we cannot rule out the policy uncertainties brought about by China’s being held hostage to the changing state of affairs.