China’s main Hong Kong stock market index — the Hang Seng — has nearly halved on net selling by foreign investors since its post-COVID peak. The index is trading at levels last seen 25 years ago and at valuation lows reminiscent of the 1997 Asian Financial Crisis. In this article, Foord Singapore portfolio manager JC XUE counters the ‘China is not investible’ argument and looks at long-term opportunities for patient investors.
DEBT LEVELS
The conversation around China's investment viability often starts with its debt levels. Critics argue that China's elevated total debt metrics (which include household debts) signal an impending crisis. China’s total debt-to-GDP ratio — which measures a country’s total debt relative to its annual economic output — sits at 250%. This figure climbs to 320% when incorporating debts from local government financing vehicles.
At first glance, this statistic seems alarming. However, it is worthwhile noting that high debt metrics are not inherently indicative of economic peril. For context, the US and UK have sustained economic growth despite comparable total debt ratios, while Japan is at the 450% mark.
As with the US, China’s debt is mostly denominated in its own currency, therefore its debt levels will not lead to currency woes. China is one big, closed system, with debts effectively backstopped by the Chinese government. This affords the government considerable control over debt management and largely insulates it from risks of default.
PROPERTY DEVELOPMENT SECTOR
Debt is useful when put to good use. In China’s case, its past focus on infrastructure development — most notably housing — has led to over-indebtedness by property developers and headwinds for the property sector. These were exacerbated after the government implemented its 'three red lines' policy to curb undesirable speculative activity. The government’s stance is that houses are for living in, not for speculation.
This reflects a deliberate, government-led effort to rebalance the economy and enhance long-term stability. These measures have had undeniable consequences on home prices and consumer confidence. Home prices across 50 Chinese cities have dropped as much as 35% in three years. However, it follows a broader strategy to redirect capital towards more sustainable and socially beneficial sectors — such as electric vehicles, batteries and high-speed rail infrastructure.
Western investors calling for wholesale stimulus of the beleaguered property sector are missing the point: the Chinese government does not wish to reflate the property bubble. Rather, it is supporting homebuyers with targeted easing measures such as prime rate adjustments and credit support for non-speculative buying.
Critics fearing a collapse like the 2008 US housing crisis also overlook key differences in market structure. China's property market features much higher down-payment requirements — 35% deposits for first homes, compared to 5% in the US — and less reliance on speculative borrowing. This adds to the sector’s resilience in the long term.
CONSUMER CONFIDENCE
Lower home prices have triggered a concomitant decline in Chinese consumer confidence — now at 20-year lows. This is indeed a headwind for the Chinese economy. However, underlying fundamentals are sound. Western economies can only dream of China’s national savings rate, which now sits at 33%. Chinese consumers therefore have cash to spend as sentiment improves. We are seeing evidence of this at the margin, with tourism revenue over the Chinese New Year period now 8% above pre-COVID levels.
REGULATORY INTERVENTIONS
However, surprise regulatory interventions, particularly in the technology and gaming sectors, have raised concern about market unpredictability. This is a valid concern and we have also felt the sting of abrupt regulatory action on our long-term Chinese investments. Yet these actions often aim to address excesses and ensure sustainable growth for the sector. Lately, the government has shown flexibility and responsiveness to industry feedback, with U-turns on aggressive regulatory changes after market backlash.
AGEING POPULATION
A final and undeniable risk to the Chinese economy lies in its demographic shifts, notably an ageing — and now shrinking — population. Comparisons with Japan 20 years ago are inevitable. However, China is less than two-thirds urbanised today. Developed Asian economies are north of 80% urbanised, with Japan at 91%. We expect another 150 million Chinese to urbanise in the coming decade, as agriculture’s share of total employment falls from today’s 20%. China’s urbanising workforce will be a natural economic tailwind for at least another decade. Adjustments to China’s comparatively low retirement age and initiatives to boost birth rates are among other measures being explored.
STOCK MARKET AT 25-YEAR LOWS
Amid these challenges, Chinese stock market valuations are trading at 25-year lows, as evidenced by the PE ratio — which measures share prices relative to company earnings — of the Hang Seng Index. This takes us back to the height of the Asian Financial Crisis, which coursed through the ASEAN region on fears of contagion — causing the Hang Seng to fall 25% in four days. However, the market recovery in 1998 and 1999 from its oversold levels was rapid.
By historical measures, today’s macroeconomic headwinds are not nearly so poor as those facing the region in 1997. Yet most global investors have exited the market in the last three years on the ‘not investible’ narrative, which oversimplifies a complex reality. Risks are certainly present, but they are mitigated by strategic policy responses and inherent market strengths. For discerning investors, today’s valuations present a compelling entry point for long-term, value-oriented investors who can see through the anti-China sentiment.
The Foord global funds have exposure to high-quality Chinese technology and consumer stocks that are half-as-cheap as the average US stock — and orders of magnitude cheaper than some US tech stocks trading on eye-popping valuations. Within these funds, the conservative Foord International Fund has about 15% of its portfolio invested in Hong Kong and US-listed Chinese companies, while the more aggressive (and longer time horizon) Foord Global Equity Fund has about a fifth of its portfolio invested in the region.
