Public Equities

China: The Great Disconnect

January 2022 – 7 min read

Chinese equities offer many unique attributes, particularly given the improving access to the onshore market, which offers investors direct exposure to China’s economy as it repositions itself for long-term sustainable growth.

It is safe to say that China has been in the spotlight lately, whether due to the country’s extensive regulatory crackdowns or ongoing trade and political tensions. As a result, many investors have been reviewing their exposures to the country and its companies. While uncertainties remain on the horizon, we believe the current regulatory cycle—which aims at providing oversight for long-term sustainable development—may be approaching an end. Moreover, from an investment standpoint, Chinese equity valuations appear relatively attractive compared to other key global markets, suggesting the current environment may provide a compelling entry point.

The Great Disconnect

China has made tremendous progress integrating itself into the global economy since announcing its Open Door Policy in 1978. China’s nominal GDP grew by 37x from 1960 to 2020, surpassing India, the U.K., Germany and Japan in the process.1 At the same time, the country leveraged its demographic dividend and the growth of its working-age population—amid a total population of nearly 1.4 billion people—and emerged as a middle-income economy. By 2020, the Chinese economy had grown to $14.7 trillion, which represents 17.4% of global GDP, making it the second-largest economy in the world.1 China is also the largest trading partner for many countries, and has cemented itself as a key part of the global supply chain.

Despite the size and growth of its economy, China is often overlooked by international investors and underrepresented relative to other global equity markets. In fact, China’s representation in MSCI’s global equity index is in the low single digits.

1. Source: World Bank. As of July 31, 2021.

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William Fong, CFA

Head of Hong Kong China Equities

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