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Two Chinas are better than one for careful investors


Investors seeking a balanced perspective on risk and opportunity in China should set aside outdated perceptions of the country as a manufacturing juggernaut and think of it instead as “two Chinas”, says global asset manager AllianceBernstein (AB). 

“While China continues to face risks in the short term, we think pessimism about the country’s medium- and long-term prospects is overdone,” says Stuart Rae, AB’s Chief Investment Officer – Asia-Pacific ex Japan Value Equities.

“The reason for this is that the good news about the structural rebalancing of the economy that’s well under way has yet to filter out to Western investors to any meaningful extent.” 

Rae notes that the Chinese government is making steady progress on its major policy goal of rebalancing the economy away from dependence on heavy industry. 

“The contribution from investment, which has traditionally been China’s main growth driver, has declined as a share of GDP while consumption and services have powered ahead. They now account for more than half of GDP and considerably more than half of the growth. 

“This is an important development in line with the government’s aim of preventing the country from falling into the middle-income trap—the point at which an export-oriented economy can no longer grow its income beyond a certain level.

“By diversifying its economy in this way, China is laying the ground for lower but more sustainable growth in future and less market volatility. That’s good news for investors.” 

According to Rae, this positive development remains largely unappreciated by investors outside China because they tend to see the country through the lens of Western companies which have large exposures to China’s heavy industry, the main casualty of the country’s broad economic slowdown. 

“These companies have been hurt by the downturn and their profits and share prices have suffered accordingly. But while these companies and the headlines about them tend to play up the ‘China slowdown’ angle, the story is not quite as simple as that.

“It’s really about these companies having been caught out by the shift in what is driving China’s growth. Their problem isn’t the economy as such, but their own capital allocation strategy, which has become over-dependent on a slowing part of the economy,” saidsaysRae.

“Investors in China in our view now need to think in terms of two Chinas – the old and the new – and balance a sense of caution about the old economy with a willingness to look for selective and well-researched opportunities in the newer sectors of consumption and services.

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