A property slowdown, Covid resurgence and a regulatory clampdown on technology weighed on Chinese stocks in 2021. 

However, ‘New Economy’ stocks could, in VanEck’s opinion, outperform as market fears about Chinese government regulation diminish.

Although Chinese policy risks create short-term ripples in the market, New Economy sectors in mainland China – such as tech and healthcare - are well positioned to benefit over the long run from the growth in that country’s economy and middle class. 

[Editor’s Note: Do not read the ideas in this story as recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this story.]

China’s economy has developed into what many now refer to as “old” and “new economy” stocks, with the old including financials, energy, materials, industrials and utilities and the new including the consumer, healthcare and technology sectors. 

On the monetary policy front, China is standing as an overachiever with elevated high levels of real interest rates, and they are high even compared to many emerging markets. Should the property slowdown drag further on economic growth this year, China has monetary policy easing space up its sleeve. 

According to CLSA research, policy easing and elevated risk premium in China high yield credits could signal outperformance in Chinese equities.

Equity market sentiment may further improve as power supply constraints ease this year. The power shortages experienced in China last year are likely to be less severe in 2022 after the China Securities Regulatory Commission (CSRC) announced plans to curb excessive speculation in the price of thermal coal.  

In addition, the situation has improved since early November 2021, after the Chinese government introduced measures to raise coal mines’ production quotas, permanently or on a temporary basis, which has pushed up production and inventory levels. This has reduced the risk of power outages in 2022. 

Within the Chinese stock market, these new economy sectors stand out:

1. Technology

The basis of the 2021 crackdown on internet platforms was to improve protection of Chinese consumers and employees in these newer industries. Too much focus has arguably been on the tech giants Alibaba and Tencent, which fell on the government’s regulatory changes. These two companies are listed on offshore exchanges and are not mainland Chinese shares, also known as A-shares. 

There are many more growth areas beyond internet platforms in the technology sector, for example, semiconductors. Being a crucial component of automation, Artificial Intelligence acceleration and the metaverse (3D internet), computer chips are likely to enter an expansion phase with strong government support and a huge global market. 

Morgan Stanley Research shows that China-designed semiconductor chips are expected to outgrow global semis with a 19% Compound Annual Growth Rates, reaching US$55 billion by 2025, as the chart below shows. 

Source: Gartner, SIA, Morgan Stanley

2. Consumer staples and discretionary

The gap between the rich and poor in China is narrowing and this tightening income gap will help boost the spending power of the masses. This, in turn, will benefit domestic brands over global ones. 

From “Made in China” to “Designed in China”, domestic brands will continue to gain more momentum this year and in coming years. Domestic brands and businesses have the competitive advantage of knowing the culture as well as leveraging the well-established e-commerce ecosystem.
 

3. Healthcare

As China’s population is ageing, healthcare will have a significant supporting role to play and healthcare spending is rising significantly. Private hospitals focus on specialists and they complement comprehensive state-run hospitals. 

In addition, the Chinese government now favours innovation in pharmaceuticals and biotech companies, and encourages them to be well differentiated in the market.
 

Access to China A-shares

Given that China will become the biggest economy in the world, having an exposure to Chinese mainland shares, or A-shares, is important for investors who want to invest in China, especially in its high-growth new economy sectors. 

Of those Australians who are already invested in China, many don’t have exposure to mainland shares. That’s because only select fund managers, including VanEck, have a Renminbi Qualified Foreign Institutional Investor (RQFII) licence and quota from the Chinese Government, enabling them to invest directly in all China A-shares. 

So, while the Chinese share market is still closed for many investors, VanEck can access this market and offer investment products to Australian investors.
 

Using ETFs

VanEck’s China New Economy ETF (ASX: CNEW) tracks the MarketGrader China New Economy Index. MarketGrader selects companies that are growing at a faster rate than the overall economy with attributes associated with sound capital stewardship and robust fundamentals, but whose future value is not yet reflected in their share price. 

CNEW includes 120 China A-shares, equally weighted, from the Healthcare, Consumer Staples, Consumer Discretionary and Technology sectors, all with the best growth at a reasonable price (GARP) attributes. 

As with all investments, investing in China carries risks. This includes trading time differences, foreign currency, political and regulatory risks. We always recommend speaking to a financial professional to determine what investments are best suited to your individual needs.