China is the world’s second-largest economy and its right in the middle of a transition. The massive economy is evolving, “from a resource-based manufacturer to a domestic-driven service [industry] such as health care, insurance and technology.” When the stock market, “began its summer-long swoon, investors showed growing confidence in the new economy. These preferences follow Premier Li Keqiang’s directive earlier in the year at the National People’s Congress.” Premier Li Keqiang called on his country to, “strengthen the service sector and strategic emerging industries.”
The difference seen between traditional exporting companies and service-firms (technology, finance, retail, and health-care) in the new-economy index are the greatest since 2009. This all comes in the aftermath of the global financial crisis, when the international demand for everything made in China evaporated.
As China wrestled with volatility and a major economic slowdown, “its less competitive industries are buffeted by rising labor costs, the widening gap between the performance of new-economy firms and old-economy companies is telling. This amounts to a bet that employment and personal income will gain from the increase in domestic consumption of services.”
China’s GDP is growing at a 6.9 percent rate that is significantly below its three-year average of 7.5 percent. “That’s more than sufficient for sustainable investment, because interest rates are much lower than nominal growth. Firms still have an incentive to borrow and invest, with the one-year borrowing rate reduced to 4.35 percent in October.”
After its recent rebound, China’s market remains cheap compared to its global competitors. “That’s because Chinese shares trade at an unprecedented 18 percent discount to MSCI World Equity Index on the price to earning basis. The discount is the greatest this year. During the past 10 years, investors paid an average 18 percent premium for China. Among health-care shares, investors are paying a 37 percent premium for Chinese stocks relative to U.S. peers, almost half the average premium of 65 percent during the past five years.”
As China’s stock market continues its recovery, you may still have questions about your portfolio and China’s impact. Talk with an expert at Apex Financial Advisors today to discuss investment opportunities and options that will help your wealth continue to thrive.