How to Invest in Stocks for the Next Phase of China’s Evolution

In an era of new economic challenges, we expect value investing to trump growth-oriented strategies for investors in Chinese equities.

Investors are asking tough questions about China as hope for its post-COVID resurgence gives way to concern about its economy. Despite the uncertainties, we think China remains investible and a value-oriented approach that targets companies aligned with government policies can deliver long-term results.

In January, it appeared as if 2023 was shaping up to be China’s year. The economy reopened to great fanfare after a prolonged lockdown and consumer spending surged. But unlike in many Western economies, aggressive government stimulus did not follow, and momentum faded. On the corporate side, sporadic lockdowns over the past three years kept the recovery fragile. It has since been weakened further by policymakers’ efforts to delever the property sector, which have slowed economic growth. Chinese stocks reflect the disappointment. The MSCI China A fell by 4.1% in local-currency terms this year through September 20, trailing both developed and emerging stocks in a rising global market.

The government’s restrained response to the challenges the economy faces has left many investors scratching their heads. Why have policymakers relied on such a limited set of stimulative measures that have as yet failed to reignite economic activity?

The answer may have had to do with diverging priorities when 2023 began. Should officials focus on the long-standing structural imbalances that have accumulated over the past two decades of debt-financed spending on infrastructure and property? Or should they address more immediate issues, including weak consumer and business confidence and slower growth? Consensus has been hard to come by, making it difficult to rally around cohesive and decisive policy action.