China innovators

High-value-added exports and technological upgrades top investor tips for ‘innovation-driven’ China

Last week at the 19th Party Congress, President Xi Jinping underlined how the Chinese economy has shifted from high-speed, to high-quality growth

PUBLISHED : Wednesday, 01 November, 2017, 8:47pm
UPDATED : Thursday, 02 November, 2017, 11:21pm

New investment themes related to China’s rising global share of high-value-added exports and technological upgrades are emerging following President Xi Jinping’s proposal of developing China into a modernised, innovation-driven country by 2035, according to analysts.

“One of our big investment themes is companies with consumer and investment upgrades to produce high-end products – that was mentioned by Xi,” said Kelly Chung, senior fund manager of Value Partners.

Last week at the 19th Party Congress, Xi said the Chinese economy has shifted from a stage of high-speed growth to high-quality growth, calling for supply-side reforms, innovation and environmental protection to modernise the economy and narrow the gap between rich and poor.

“The real story of interest for investors is the radical shift from imitation to innovation within the country’s economy,” added Gary Greenberg, head of emerging markets at Hermes Investment Management.

His company is predicting that by 2020, it will spend 2.5 per cent of its GDP on research and development – a 70 per cent rise in absolute terms since 2015, and in line with the developed world.

Those implications will be far-reaching not just for investment, but geopolitics and world culture too. Technology companies represent more than a quarter of the emerging markets benchmark index, and 99 per cent of the market capitalisation of technology is listed in Asia.

China’s global share of high-value-added exports surged to 15 per cent in mid June 2016 from about 8 per cent a decade ago, according to data from the World Trade Organisation and Morgan Stanley.

Riding on such optimism, Value Partners said it plans to launch a new Asian Fixed Income fund on November 13. The indicative portfolio will comprise of equities in Greater China (48 per cent), Singapore (10 per cent), Malaysia (6 per cent), Thailand (5 per cent), Korea (1 per cent), and the remaining 30 per cent invested in corporate debt.

Helen Zhu, head of China equities at BlackRock, also says that structural reforms and reduced financial risks, should benefit value stocks that are undervalued relative to their fundamentals, including high-end capital goods producers, selected financial companies, and manufacturing industry leaders.

“We believe government resources, including fiscal spending, tax subsidies, land and credit supply, will be increasingly tilted towards bolstering industries to meet the ‘people’s ever-growing demand for a better life,’” she said.

CIFM Asset Management Hong Kong tips “innovative medicine”, particularly, after recent decisions by the medical regulator to speed up their approval processes, after President Xi laid out health care policies to promote a “healthy China”.

One of our big investment themes is companies with consumer and investment upgrades to produce high-end products
Kelly Chung, senior fund manager of Value Partners

Xi’s comments that houses are for people to live in, not for speculation, led to market players seeing scope for expansion in the housing market.

Despite property policies expected to stay tight and demand to slow into 2018, activity may remain supported because China’s urban areas may require around 1 billion square metres of new accommodation over the coming years, Bank of America Merrill Lynch said.

“With the reforms in the property sector, leading property companies have stayed in the market while small companies are being gradually phased out. This means the overall Chinese property sector has been much healthier,” said Value Partner’s Chung.

Alex Wolf, senior emerging markets economist at Aberdeen Standard Investments, said sectors where China still needs to absorb foreign know-how, such as electric vehicles, semiconductors, artificial intelligence, finance, and supercomputers may be boosted and opened further for greater foreign investments.