Ask the Manager: Why China Remains a Key Investment Opportunity

Welcome to Ask the Manager, ETF Central's new series where we engage with experts and portfolio managers to explore trending investment topics, market updates, and economic insights—empowering you to make informed decisions and uncover opportunities with ETFs.

Last week, we spoke with Malcolm Dorson about Argentina's economic revival and its implications for investors.

This week, we sat down with Anthony Sassine, Head of MENA and Senior Strategist at KraneShares, to discuss why China remains a vital investment opportunity. Despite short-term challenges, Sassine highlighted China's long-term growth potential driven by innovation, consumption, and undervalued sectors.

Why China Remains an Important Investment Opportunity for Investors?

China is the second-largest economy with strong growth potential, innovation, and resources across many industries and sectors. In addition, the government has ample tools and resources to direct the economy and achieve structural growth. While the past couple of years have been difficult and disruptive for China’s economy and investors, the long term story hasn’t changed.

China will continue to be driven by consumption, urbanization, and innovation in the foreseeable future. We believe investors should be exposed to sectors and industries aligned with China’s long-term aspirations and goals. As such, our top sector picks include China's internet, cleantech, health care, consumption, and certainly semiconductors.

China has challenges in the short term. However, the government has been working on overcoming issues impeding China’s long-term potential. Furthermore, valuations and positioning are extremely low compared to other EMs in the US. The gap in valuation between China and EM ex-China is currently above 3 standard deviations, mainly due to the extremely bearish sentiment on China and bullish sentiment on AI.

What Are the Issues Facing China and How Do You Think They Will Overcome?

China has been affected by multiple factors over the past three years, starting with the COVID lockdowns, which impacted consumers tremendously. While well-intentioned, regulations of the digital and real estate economies have had significant unintended consequences on property prices and demand, consumer demand, private companies, and youth unemployment, among other things. 

We believe China will return to its virtuous secular growth cycle through policy and government intervention. The government has realized that recently and rolled out one of the most ambitious stimulus packages in the past decade. This has been positive in lifting growth and economic activities, but it has not yet translated into stronger consumer demand and private company investments.

We believe the government will continue to stimulate, and we hope it will focus solely on the demand-side stimulus or direct economic transfer of gains from industry, manufacturing, and infrastructure to consumers. This can be done through direct checks to the Chinese, as in the US and EU during COVID-19, subsidies for housing, stabilization of the real estate markets, increasing real wages, job opportunities in engineering and business, etc.

What is the Recommended Approach to China?

We always advise investors that having no allocation to China will ultimately hurt their portfolios. The recent performance of Chinese equities, especially China Internet in September and October of 2024, is an excellent example of a sudden rebound in China that could potentially wipe out active returns gains accumulated during weak market performance.

Given our belief in China’s long-term potential, as outlined above, we recommend that investors' global equity allocation reflect this potential, especially vis a vis other markets in EM or DM. Hint: the widely used global equity benchmarks are a poor representation of China’s economic position globally due to restrictions on the China A onshore market and the shares float methodology.

How Do You Think Trump Will Impact China?

Trump will undoubtedly shake things up. Economic theory or long-term institutional norms mean less to Trump, while his traits and ability to get along with leaders on the other side of the table could take center stage.

We believe that Trump will be positive for China in the long term. The short term may be shaky, but we believe Trump will prioritize reaching a deal with China in the first half of his presidency. Decoupling between China and the US will ultimately hurt US consumers and potentially pressure inflation.

Also, China's recent economic woes make it less likely for its leaders to take high negotiation risks. The technology war will continue, but China is already making progress in its ability to develop high-quality chips.

What Are You Watching Closely Today in China for the Short Term?

First, I am watching the Chinese government’s announcements on stimulus and economic policies, especially this December, as the CEWC is expected to meet and set growth targets and high-level economic trajectories for 2025. This meeting is followed by the closely watched China’s National Party Congress (NPC) meeting in March of 2025, which will formalize and announce new targets and initiatives.

Second, we are watching Trump's tweets, government appointments, and announcements on trade and China. Thirdly, China's consumer sentiment improvements will unlock record savings in the economy and stock market as sentiment and consumption improvements start to be reflected in China's internet and services companies.

Finally, I am watching global indices' decision to raise restrictions limits on China’s A Shares market, which has been capped at 20% of its total value in the index. Raising the limits should help direct tremendous flows into the underworld, underappreciated A-Shares market, or stocks listed on the Shanghai and Shenzhen exchanges.