Ironically, the People’s Republic, ruled by a communist party, shines with noticeably strong growth. For investors, this offers opportunities – and dangers.
in Beijing a few days ago the National People’s Congress nodded off the new five-year plan. The traditional five-year plans are politically very important for the country. This time it was a premiere: for the first time, no average growth target was given for the next five years.
According to experts, this shows that the country is changing course and focusing on qualitative growth in order to focus on the country’s long-term prosperity. Focusing on bare numbers seems to be a thing of the past in China for now. The country should therefore become all the more interesting for long-term investors.
China is doing well. The People’s Republic is the only G-20 country to show positive economic growth for 2020. The stock market has also grown significantly in recent years. “It is not presumptuous to state that China’s position in comparison to the other major economic powers has never been as strong as it is today,” says Tilmann Galler, capital market strategist at JP Morgan.
The free trade agreement RCEP, with which Asia should replace the United States as the leading economic area, will help to achieve this position in the future. “Above all, China is expanding its economic strength and influence – this is a great opportunity for investors that very few have recognized so far,” says Nikolas Kreuz from Invios Asset Management. The figures for the RCEP free trade agreement are also quite impressive: More than 3.5 billion people from 16 RCEP countries, through which 40 percent of world trade passes.
High debts
China is likely to be the locomotive of the free trade agreement and at the same time ranks deep in terms of its own growth figures, says Kreuz. The OECD expects a GDP of around 8.5 percent for 2021. Goldman Sachs is now even assuming double-digit growth, while China itself officially announced at least six percent as a target.
Tilmann Galler is also positive about investments in China, but at the same time advises that investors also keep an eye on some possible risks. This includes, for example, the high level of debt.
China’s national debt rose to 62 percent of GDP in 2020. At first glance, this cannot be compared with the 98 percent in the euro zone or the more than 130 percent of Americans. “But in total with the highly indebted corporate sector and private households, the total indebtedness of the economy rises to 278 percent,” says Galler.
At the current 3 percent interest rate, he believes that debt servicing is a bigger problem in China than in the United States with 0.7 percent and the EU with 0 percent. “Fiscal policy is likely to be more consolidating than expanding in the coming years. This could reduce the Chinese growth lead over the other major economies – provided that the global vaccination campaigns are successful, ”states the capital market expert.
A second major construction site in China is still its relationship with America . Because China recorded a real export boom in the second half of 2020 and the trade surplus rose again towards the old record.
As a result, China was unable to fulfill the agreement with America to expand imports from the United States. “This circumstance and the stronger focus of the Biden government on sustainability and human rights should continue to hold some potential for conflict between the two nations,” estimates Galler.
China’s bad guys at a discount
Despite the two risks, Galler still points to good investment opportunities on the Chinese stock market. Last year, the P / E ratio of the CSI 300 Index, which tracks the two stock exchanges in Shanghai and Shenzhen, rose to 16, but compared to stocks in the industrialized countries, this is still a valuation discount of almost 25 percent.