Macro Outlook

China: the outlook is bright for longer-term investors

China’s economy has recovered faster and stronger than most due to decisive action on the pandemic. While challenges remain, China continues to diversify their economy and the spending power of the middle class continues to grow.
February 2021

Risk warnings

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any stocks or products that may be mentioned.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Investing in emerging markets is generally considered to involve more risk than developed markets.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Quick to get the pandemic under control, with stronger and more decisive action than the majority of other nations, China’s economy has recovered faster and stronger than most. While challenges remain, China continues to diversify their economy and the spending power of the middle class continues to grow. There are many reasons why the outlook is bright for China, not least the most recent Five-Year-Plan with an increased focus on sustainability. Opportunities abound for long-term investors to capture the returns generated by businesses that benefit from these structural changes.

A stable economy with job creation is a priority

China’s economy has remained resilient through the pandemic, with GDP returning to growth in the second quarter while achieving 2.3% year-on-year growth overall for 2020 as a whole. The market consensus expects a sharp rebound to 8.1% GDP growth in 2021 (Oxford Economics1). We are more cautious and believe GDP will be slightly higher than the trend growth of about 6-7%, provided the world economy and demand are holding up. Keeping a stable economy with adequate job creation is a key policy objective. At the same time, policy makers are keeping an eye on risk management.

The world is flooded with liquidity, and while China was not as aggressive as the US or Europe in providing monetary easing in 2020, it is already starting to tighten the tone of policy expectation. Structural problems like the Chinese debt overhang remain a concern. The aggregate debt level in China remains high and credit quality in the banking system is questionable. As the economy recovers, the central government may want to reign in the growing credit and asset bubbles.

China’s long-term secular growth drivers – particularly rising income levels for an increasingly aspirational urban middle class – remain very much in place. Consumer demand has already seen robust recovery since the lowest point in February 2020, returning to positive year-on-year growth since August.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any stocks or products that may be mentioned.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Investing in emerging markets is generally considered to involve more risk than developed markets.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

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