Having been the first to be struck down by the coronavirus (Covid-19) but also the first to pull back to recovery mode, China’s economy has seen a near V-shaped recovery after successful efforts at containing virus outbreaks.

The world’s second largest economy grew by 2.3% in 2020 after contracting 6.8% in the first quarter in the aftermath of the pandemic which had first hit the city of Wuhan, leading to lockdowns which were later extended to a less restrictive basis to other cosmopolitan centres such as Beijing and Shanghai.

The economy however returned to growth by the second quarter of last year and macroeconomic data such as industrial output and the Caixin indices have seen progressive monthly improvements since the third quarter which prompted Fitch Ratings to raise its forecast for the mainland’s economic growth in 2021 to 8%, up from its earlier 7.7% forecast in September.

This would be well above Fitch’s estimate of China’s long-term growth potential of around 5.5%, on the back of a significant recovery in Chinese consumption, particularly in the catering industry and other activities that involve social gatherings once more people are vaccinated.

First-quarter gross domestic product (GDP) has soared by a stellar 18.3% compared to a year ago with retail sales for March up by 34.2%, topping expectations of a 28% increase.

A December survey by HSBC of nearly 1,000 top global institutional investors and large corporations saw 62% planning to increase their China portfolio by an average of 25% over the next 12 months. Among the equity investors, 71% are looking to increase China exposure.

China remains under-represented in most global investment portfolios despite a surge of inflows which saw foreign holdings in Chinese onshore equities more than doubled over the past two years to more than $400 billion.

There are even some suggestions that investors should now consider Chinese equities as a standalone allocation rather than be a part of global or emerging market strategies to reap the full benefits of diversification and returns. Another tailwind will be the likely rise of Chinese household assets participating in onshore equities.

Investment themes and opportunities in the post-Covid 19 landscape for China

China stands out as an attractive investment destination for several reasons.

First, it can implement efficient and effective governance with a longer term perspective on national policies as the state is not hostage to the need for short-term political quick fixes arising from elections.

Secondly, the domestic market is immense with multiple and diverse demand drivers and adequate buffers from short-term setbacks or cyclical downturns and sectoral corrections.

Third, China still has ample policy ammunition with positive real rates and modest deficit and fourth, it continues to open up to the rest of the world.

The pandemic has prompted an increase in healthcare-related investments and lifestyle changes such as telecommuting or working from home which will see the online economy take on new trajectories.

We see several areas for investment opportunities post-pandemic.

Firstly, medical infrastructure development will accelerate. As the government will be issuing 1 trillion yuan in pandemic special bonds to fund local public health infrastructure, sectors that benefit are those in medical devices, vaccine development, innovative drugs and related industries.

The second is consumption upgrade given China’s huge and diverse domestic demand. Its Internet economy has developed by leaps and bounds, and the pandemic has spawned a jump in online games, entertainment and consumption. There are also other consumption upgrades in traditional goods, services and changing patterns of consumption among millennials.

Thirdly, the US attempts to contain China’s technology advance has spurred China to accelerate in its technology and industrial upgrade. The technology sector represented by 5G, semiconductor chips, new energy, and advanced manufacturing is progressing rapidly. We seek investment opportunities in these sub-sectors where China has certain competitive advantages.

Some of the long-term goals spelled out in its latest Five-Year Plan (2021-2025) include prioritising the quality of growth rather than the quantity of growth; becoming a self-reliant technological and manufacturing powerhouse; accelerating the drive towards a low-carbon economy to help achieve its climate goals.

China A-shares representation in global indices will also rise significantly. Valuations are not as extended compared to those in developed markets. With positive interest rates and modest deficit, the government still has ample policy ammunition to tackle future contingencies.

The article is an updated version of an UOBAM contribution to the Professional Investment Advisory Services (PIAS) quarterly newsletter.