Reasons to invest in China in 2017
In the late 1970s, China liberalised its state-run economy and initiated a series of market reforms. Consequently, the country witnessed a several decades-long economic boom that lifted more than 800 million of its people out of poverty.
But Chinese economic growth has been losing its momentum of late. The rise in GDP has fallen from 10%+ every year to a more subdued 6% to 7%. In 2016, GDP grew by 6.7%. The government is targeting a growth rate of 6.5% for 2016-20. Although this is lower than what the country has achieved in the past, it is substantially more than the rate at which western economies are expanding.
In this environment, is it prudent to invest in China?
Several factors indicate that the China story is far from over. In fact, the country could be at the beginning of the second phase of its growth. This time around, economic expansion would be fuelled by its large middle class and a new wave of measures that could help to reinvigorate the economy. If you are prepared to start investing in China now, click here
The five points listed below indicate that the next phase of China’s economic growth may be just about to begin.
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1. The One Belt One Road initiative
Chinese president Xi Jinping has said that the One Belt One Road (OBOR) program will be the “project of the century.” The name is derived from the Silk Road Economic Belt and the Maritime Silk Road. A total of 65 countries have been identified along the Belt and the Road. These countries will form part of the mega initiative that has been taken up by the Chinese government.
Source – Quartz Media
Initially proposed in 2013, OBOR involves an estimated investment of US$5 trillion on roads, rail transport facilities, gas pipelines, and power generating units. The countries that the project involves, produce 30% of global economic output. Over 60% of the world’s population live in countries that are part of the OBOR initiative.
China recently hosted representatives from 52 countries at a summit held in Beijing. The focus was on giving the OBOR program a push.
Approximately 50 Chinese government-owned companies are already working on over 1,500 projects which fall under the OBOR umbrella.
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2. Development of the Xiongan New Area as a special economic zone
One of the reasons that China is developing the Xiongan New Area is to reduce the pressure on Beijing, which has seen its population mushroom to a massive 22 million. The special economic zone is located in Hubei province and is approximately 100 kilometres from Beijing. The government has said some of, what it terms as “non-capital functions,” will be moved to the Xiongan New Area.
How will this initiative help? Apart from decongesting Beijing, there is a broader plan to integrate the economies of Hubei, Beijing, and Tianjin.
China has a long history of developing immensely successful economic zones. In 1980, it established the Shenzhen special economic zone. Today, the area has a large number of shipping and logistics companies and it has also established itself as a high technology manufacturing hub as well as a financial centre.
The Xiongan New Area has the potential to attract large volumes of investment and give a boost to the economy in the region.
3. Liberalisation of markets through seven new Free Trade Zones
In March this year, the Chinese government announced a proposal to establish free trade zones in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi. The country established its first free trade zone in Shanghai in 2013. Subsequently, in the following year, three more were established in Guangdong, Fujian, and Tianjin.
A free trade zone can attract large volumes of overseas investment. These zones usually offer facilities that include free convertibility of the local currency, concessional or nil duties for imports and re-export, and a reduced level of restrictions on foreign direct investment.
The new free trade zones will focus on different areas. Chongqing will work towards promoting the OBOR program while Zhejiang will develop large capacities in international maritime services and oil storage.
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4. Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect
In 2014, the Shanghai – Hong Kong Stock Connect was launched. The purpose of establishing this link was to give international investors the opportunity to buy shares listed on the mainland. The tie-up also provided mainland investors the ability to invest in stocks traded in Hong Kong.
With the success of this move, the Shenzhen – Hong Kong Connect was launched a few months ago. Trading, which began in December, gives investors in Hong Kong the opportunity to buy 881 Shenzhen-listed stocks. A daily limit of 13 billion yuan has been established for northbound investment. The limit for purchases in the opposite direction is 10.5 billion yuan.
A number of technology stocks are listed on the Shenzhen exchange. This will prove to be a major attraction for Hong Kong investors. The Shanghai exchange lists comparatively few tech stocks.
5. China’s focus on economic stabilisation
Some analysts have been making dire predictions about China’s economy. The main issues they raise concern the overheated property market, rising debt levels of companies as well as individuals, and the number of loss-making state units.
Despite these issues, the Chinese economy has been performing well and growth rates have been at targeted levels. The government has said that “stability” will be the dominant theme for guiding its actions in the near future. The official news agency, Xinhua, has stated that “China… made stability as the basic tone for next year’s economic planning.”
How exactly does the Chinese government intend to achieve this end? Although it has not stated what it will do, it is likely that it will try to keep its currency at current levels and stem the surge of capital outflows. Meeting economic growth rate targets will, of course, remain a priority.
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China’s economic prospects remain positive
In April, the manufacturing purchasing managers index (PMI) stood at 51.2 while the services PMI was at a level of 54. Both indicators registered declines from the previous month but remained well above 50. A score that exceeds this level means that the economy is expanding.
Additionally, in the first quarter of the year, China grew at a 6.9% clip, recording two consecutive quarters of economic expansion. This is the first such instance in the last two years.
These developments indicate that the outlook for China’s economy remains positive. Investors with a medium to long-term time horizon would do well to consider the opportunities that are currently available to them.
Timing is key with investing, so if you want to take advantage of China’s growth opportunities, you have to act quickly. Sign up with Phillip Futures <here, and get started on your investment journey now.