China currently offers attractive investment opportunities due to its distressed market and potential for future growth; however, its economic and financial market stability is supported by the possibility for greater levels of government stimulus, said Eastspring Investments portfolio manager Navin Hingorani.
Hingorani noted that growth in China over the next decade will be led by consumer-driven sectors rather than investments, with rising allocations from institutions forecast to support prices in 2025.
“While the last 20 years have been investment led, we think the next five to 10 years will be consumption led and will offer investors many interesting investment ideas,” he said, noting that Chinese consumers have “the highest savings rate in the world”.
“While we are waiting for greater levels of consumer confidence, we certainly see very good opportunities in the Chinese consumption space for investors,” Hingorani added.
He noted that at a 12-month forward price-to-earnings ratio of 9.8 times, at the end of November, the MSCI China index was trading at a discount relative to its history.
Although Hingorani sees this upside, he highlighted that more stimulus could further lift investor sentiment.
China’s ‘Band-Aid’ solution
According to Morgan Stanley’s Investment Management Outlook for 2025, Chinese policymakers have focused on delivering a series of stimulus packages since September to revive China’s struggling economy and boost share prices, instead of taking a broader approach to address the economy’s root issues and structural weaknesses.
According to the analysis, high debt levels, over-investment, an unresolved property bubble, as well as underwhelming domestic consumption and international trade pressures have all contributed to the inefficiencies that “mere stimulus packages” cannot resolve.
“Until China addresses the root issues – excessive debt and inefficient investment – these stimulus measures will remain mere Band-Aids,” the firm said.
However, it cautioned that while these measures may temporarily inflate nominal growth and trigger short-term cyclical market rallies, they will be “incapable of providing a sustainable economic recovery or a stock market breakout”.
“There are no quick fixes to China’s economic growth model,” the firm stated, emphasising that only a complete debt restructuring and government-led income redistribution could drive positive change.
The analysis determined that China’s “staggering debt” lies at the core of all the challenges, with a total debt-to-GDP ratio soaring to around 350 per cent.
Moreover, the state’s dependency on debt-fuelled expansion has led to an erosion in its productivity while overinvestment – another major problem – saw close to 45 per cent of its gross domestic-product (GDP) funnelled into projects that now face dwindling domestic demand.
The outlook also highlighted the cyclical nature of China’s stimulus and noted that since the Global Financial Crisis, the second largest economy has announced five major stimulus packages.
“China’s latest round of stimulus, its fifth in 15 years, illustrates a recurring pattern of fiscal and monetary intervention that boosts growth temporarily”, the report said, given that historically, each stimulus provided only a short-term market lift.
Moreover, China’s property market, which accounts for approximately 60 per cent of the country’s net worth, is currently under significant strain and China’s reliance on its property as “a store of wealth” makes its economy vulnerable to downturns in real estate, the firm noted.
Therefore, the report highlighted that any effective economic solution must address challenges within the property sector and its cascading effect on wealth, consumption and financial stability.
“Lessons from other debt-laden economies suggest the path to stability requires cleaning up bad debt through either write-offs or debt restructuring, followed by bank recapitalisation,” said Jitania Kandhari, deputy chief investment officer of the solutions and multi-asset group and head of macro and thematic research for the emerging markets equity.
“This approach is undeniably painful, as it acknowledges financial losses, but without such drastic measures, stimulus packages will continue to provide fleeting relief. A deeper transformation must occur for lasting economic health.”
