HUB EXCLUSIVES PANEL DISCUSSION 2023 – THE IMPACT OF A SLOWING CHINA ACROSS ASIA
Panel discussion, hosted by Cherry Reynard, with:
Will Scholes, Manager of the Premier Miton Emerging Markets Sustainable Fund, Premier Miton Investors
Sam Konrad, Investment Manager in the Jupiter Asian Equity Income team, Jupiter Asset Management
Tim Erskine-Murray, Investment Specialist Director, Baillie Gifford
China has been the engine of Asian growth since its entry into the World Trade Organisation in 2001. However, its economic grip is weakening. In the short-term, its post-Covid reopening has been lacklustre with consumers still reluctant to spend. In the longer-term, it faces a demographic crisis, problems in its property sector and geopolitical challenges. Investors in Asian markets need to take a view on whether China’s recovery is cancelled or postponed.
The World Bank has made its views clear: it recently cut its forecast for China’s growth next year and warned that growth in east Asia’s developing economies would expand at one of the lowest rates in five decades as a result . It believes China’s economic output will be just 4.4% for 2024, a long way from the growth rates of 7-8% it was experiencing until recently.
The counter argument is that 4.4% is still strong growth, particularly for the world’s largest economy. The east Asia economies are still likely to experience growth in excess of 4.5%, even if this is lower than previous predictions. Compared to the indebted, slow-growing economies of the West, this would still appear to be a fertile area for companies to thrive.
In general, Asian fund managers appear to be more enthusiastic about the opportunities across Asia than they are about the opportunities in China. Sam Konrad, investment manager in the Jupiter Asian Equity Income team, says: “The Chinese economy has still got considerable headwinds. We are concerned about the demographic headwinds, with the UN forecasting the Chinese population could halve by the end of the century. On geopolitics, we think the tensions between China and the large democracies of the world are likely to get worse rather than better. We see daily concerns about the levels of debt in various parts of the Chinese economies.”
He points out that returns for Chinese equities haven’t been very appealing and may continue to struggle with no real catalyst for sentiment to revive. He says they have no holdings in mainland China in the Jupiter Asian Income portfolio.
Nevertheless, Will Scholes, manager of the Premier Miton Emerging Markets Sustainable Fund, says that as long as China can continue to grow at a moderate pace, it will still be a source of growth for the rest of Asia. He admits there will be areas of vulnerability – the lack of outbound tourism from China is a problem for Thailand, for example – but Chinese key imports such as iron ore have held up.
China plus one
There may be beneficiaries from China’s weakness, and the drive by companies across the region to diversify their supply chains away from China. Tim Erskine-Murray, client services director, Asian equities, Baillie Gifford, says: “This appears to be driven by geopolitical considerations rather than economic ones, but we’ve seen low-end manufacturing moving to Bangladesh, Cambodia, Vietnam, Indonesia and starting to move in India as well.”
Konrad adds: “A lot of international companies around the world have been very reliant on China as a manufacturing base and now want to reassess their manufacturing footprint. Apple has said it wants 25% of its iPhones manufactured outside China by 2025. That’s not far away and it appears to be on schedule. It is moving to India and Vietnam.”
This is creating tangible opportunities across the supply chain. Konrad adds: “In India, for example, a lot of companies will benefit as the country moves up the technical know-how curve and develops its own supply chains. That will benefit Indian employment, consumption and the broader Indian economy. In Vietnam, we haven’t found a way to play it directly, but we do play it indirectly.” Scholes says that certain sectors are likely to see the greatest benefit, including light manufacturing, electronics assembly, testing and cleaning.
Higher quality growth
Nevertheless, it is plausible in the longer-term that China revives and ultimately builds higher quality economic growth. Its long-stated ambition is to gain greater economic self-reliance through a larger consumer economy and it has had some success in delivering this.
Scholes adds: “It’s important to bear in mind what China’s trying to do with its export basket. It has been a long road towards upgrading in terms of its value-add. If you look at imports to the EU of mobile phone equipment, you can see China’s declining share, and the rising share of countries such as Vietnam. However, if you look at autos, notably electric vehicles, you can see China’s share rocketing, almost from a standing start.
“This is a very long road. The ex-commodity manufacturing share for China is massive compared to the wider ASEAN region. It grew during Covid because it was the only place with spare capacity. It will be years before that is eroded, but also years before other countries get to the same service quality and flexibility that is seen in China.”
It is tempting to portray China’s weakness as a reason to bypass Asia altogether. The reality is far more nuanced, with different sectors and countries affected unevenly. Plenty of companies will be beneficiaries and there is still more than enough Asian growth to go round.
