Confucius said – I hear and I forget. I see and I remember. I do and I understand.
Which surely has a kind of message for those thinking of investing in China.
Many were worried about a sharp slowdown only 12 months or so ago. Yet, in the 12 months to 30 October this year, the Investment Association’s China/Greater China sector returned over 23 per cent.
So why haven’t investors filled their boots?
There have been many distractions.
Brexit, Trump and North Korea seem to be dominating the news.
Then there is Xi Jinping, President of the People’s Republic of China and General Secretary of the Communist Party. He began his second five-year term by ordering the country’s 2.3 million-strong military, the world’s largest, to intensify its combat readiness by focussing on how to win wars.
He is accused of trying to turn himself into another Mao Zedong, attempting to dominate the South China Sea and ratcheting up pressure on Taiwan.
Consequently, some have taken their eyes off the ball, as is often the case – missing out on seemingly unfancied China’s strong performance while chasing the gains elsewhere, such as India, which over the last year has arguably done less well.
The Chinese economy, by some measures the world’s largest, advanced 6.8 per cent year-on-year in the third quarter of 2017, following a 6.9 per cent growth in the previous two periods.
OK, this was against China’s annual average growth rate of 9.69 per cent from 1989 until 2017, but still decent.
Janus Henderson Investors portfolio managers Charlie Awdry and May Ling Wee say this steady performance harks back to old times.
They stated: “At the start of 2017, many investors worried about a sharp slowdown in China.
“There were expectations that the country’s property market would soften and the government would tighten monetary policy and rein in speculative investments and illegal activities. So far, however, economic growth this year has been surprisingly resilient. Even more interestingly, much of the growth could be attributed to a rise in industrial output – or China’s old economy.
“The cyclical improvement in Chinese corporate profits has exceeded analyst expectations, both in the size of the upswing and in how many different sectors of the economy have benefited. This is due partly to the return of rising prices, helping commodity-driven sectors. Improving consumer confidence and expenditures, as well as product innovation and the rise of social media advertising, have also aided economic growth.
“Although the old economy is expected to slow down, the companies that make up this segment – steel producers and packaging and paper manufacturers, for example – generally delivered positive earnings. State-mandated capacity cuts and environmental regulations have led to the shutdown of inefficient operations, improving the pricing and profit margin environment for many industries. We also believe analysts have underestimated the positive operating leverage that is coming through corporate income statements as a result of improving top line growth.”
How sustainable is the rebound?
They went on: “Returns on capital employed and returns on equity in many of these old economy industries may have bottomed.
“In fact, these metrics appear to be improving, as companies have scaled back expansion plans and capital expenditure just as the economic cycle and cash flows improve. Currently, this is translating into higher dividends for shareholders. We think any sustainable improvement in return on assets in the current economic cycle would be a very bullish sign for China.”
A word of caution – China is still a high risk area and should only be given consideration for a small part of most diversified investor portfolios due to the risk involved.