HUB EXCLUSIVES PANEL DISCUSSION
Panel discussion, hosted by Cherry Reynard, with:
Dale Nicholls, Portfolio Manager, Fidelity China Special Situations PLC, Fidelity International
Qian Zhang, Investment Specialist, Emerging Market Equities, Baillie Gifford
After some false starts, the country is addressing some of the key problems in the economy. After an unwelcome clamp-down on technology companies, it has reembraced entrepreneurship, for example, while the country’s ‘anti-involution’ initiatives have sought to deal with over-supply in certain industries. The country has diversified its export base.
However, a missing piece is still the Chinese consumer. Key to unlocking its undoubted firepower is the property market. Here, there are small green shoots, but Qian Zhang, investment specialist on the emerging markets client team at Baillie Gifford, says there is still some way to go: “It's perhaps fair to say that we've passed the peak of the pain, but it is a very long, slow, engineered process of structural slowdown. Real estate and related sectors as a percentage of Chinese GDP have decreased from around 30% to 15% in the past few years. Incrementally, the impact will be lower.”
“However, the property market does have an impact on consumer confidence. In China, households have around 70% of their family wealth in their home. That's why they’ve been in saving mode. Net savings since the pandemic across Chinese household has grown more than $10 trillion. That's a lot of pent-up spending power.”
Dale Nicholls, manager of Fidelity China Special Situations plc, agrees that the spending power is there: “A key factor may be prices themselves. There is good potential for that to stabilise, just in terms of a supply/demand adjustment, The hope is that things aren't getting worse.” He believes that consumption should still outgrow the overall economy, and that's a key goal for the government. “Those factors combined with very negative sentiment, almost apathy, in the consumer space, which has driven valuations lower, is creating opportunities.”
New source of growth
There is a range of new growth drivers in the Chinese economy, from the energy transition to higher end manufacturing. The country has shown itself to be an innovation powerhouse, notably with the advent of DeepSeek in 2025. It is also innovating in robotics, in clean energy, and in other areas of technology.
Nicholls says: “Meeting companies, you really feel that pace of innovation. It’s something that we see developing over time. R&D spending has significantly expanded. That is clearly leading to the increased competitiveness of companies. The scale of the opportunity is also important - you've got companies with huge domestic markets.” He is seeing opportunities in the battery supply chain, plus in automation and robotics.
Zhang adds: “One interesting thing to note from the third plenum in 2024, and the recent five year plan, is that we see a top down, very dedicated focus on the science and technology sector. Yes, there are long documents talking about property, but there are hundreds of pages talking about talent, how to educate on science, innovation, technology, and maintain a very high level of R&D at a national level until at least 2030. So there’s a very strong top down impetus to support companies’ ambition as well. That’s creating a lot of opportunities in these more innovative areas.”
For Baillie Gifford, the headline GDP growth figure is less important than the nuances happening in the economy. Instead, says Zhang, they are looking at who is winning from the various initiatives and whether they will continue to do so. On the consumer, for example, she says: “Where we try to focus now is not really the inflection point of consumer recovery, but more the nuanced consumption patterns.”
“What we've observed on the ground is Chinese consumers, especially the younger ones, moving to more experience-based options - restaurants, bars, cinemas, etc. This creates a lot of opportunities at the company level.” Nicholls says the latest consumption data is showing some green shoots of recovery and the underlying drivers for consumer growth remain strong.
The macroeconomic backdrop for China is solid, even problems around the property market and the pockets of over-supply remain. Any revival in consumer confidence would support growth, but new industries are emerging and innovation continues at pace. With valuations still low, it makes for a compelling backdrop for stock pickers.
