The Week: China: does its recent weakness bring opportunities?

It’s been a horrible year for investors in China – and the most recent growth statistics brought little cheer. But might this bring opportunities?

  • GDP figures this week confirmed China’s economic slowdown
  • A clampdown on lending, plus the country’s zero Covid policy have hurt growth
  • A lot of bad news is now discounted in Chinese companies

China’s economic growth has seen a notable deterioration, confirmed by GDP figures at the start of this week. From a breezy 6.5% at the same time in 2020, economic growth has slowed to a sluggish 4%. Even Chinese policymakers are worried.

The roots of the economic weakness are clear: the government has clamped down on lending, which has dented the property sector. Evergrande has been in the eye of the storm, with its future in the balance. The country’s zero Covid policy continues to hurt growth, particularly in areas such as Hong Kong. Also, the Chinese economy continued to grow during 2020, leaving less of a ‘bounce-back’ trade.

For stock markets, there were other forces at work, notably concerns about an unpredictable regulatory environment. The government’s pursuit of ‘common prosperity’ has seen it clampdown on companies perceived to do social harm – online education, internet stocks, gaming. While the government’s aim may be to encourage innovation in the longer-term, many investors have considered the environment too risky and withdrawn from Chinese markets.

While this seems like an unappealing backdrop, there is a lot of bad news now discounted in Chinese share prices. It was the worst performing sector, bar Latin America, for the calendar year 2021 with the average fund dropping 10.7%. It has continued its weakness in the early weeks of 2022.

Before investors get too excited about the potential bargains on offer, it is worth saying that many of the worst falls were seen in under-pressure industries. Areas such as green energy have largely held their value, so there aren’t a lot of great stocks at cheap valuations. Nevertheless, some fund managers in the region have started to nibble at the Chinese internet stocks, believing that the impact will not be as damaging as prices suggest.

There are better signs on the economy too. While the Chinese government appears unlikely to abandon its zero Covid policy any time soon, it is easing monetary policy to stimulate growth. Policymakers are clearly concerned enough to take action, while also recognising that they need to keep inflation and speculative lending in check.

This doesn’t seem like the worst time to be taking another look at China. Certainly, there is more value now than there was a year ago when the economy and stock markets were riding high. Investment trusts in the China sector are trading on record high discounts. Ultimately, the long-term growth story for China remains in tact and investors need to take their chances while they can.