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Should Chinese equities be considered a standalone asset class?
The question has been discussed over the past four years, and is raised again, this time more ardently, in the wake of Covid-19
28 Jan 2021 | Janette Chen

As China continues to post a strong recovery from the Covid-19 pandemic, global investors hold an increasingly positive view on Chinese assets, especially equities. Portfolio managers have again raised the point of Chinese equities being treated as a standalone asset class just like how US equities were treated 30 years ago. 

The idea is not new. “It has been dominating several conversations I have had with investors over the last two to four years, where investors are debating this very question in terms of how they treat and regard Chinese equities,” says Michael Lai, senior vice president, portfolio manager, Franklin Templeton Emerging Markets Equity. 

The debate centres on how the Chinese stock market should be viewed within the context of global asset allocation. Currently, it is considered a part of the emerging markets.

“Increasingly, investors or the general public have concluded that China has become and will continue to be a very dominant economy. The way the country was able to handle the pandemic is a testimony of that,” says Lai. 

According to the International Monetary Fund (IMF), China’s GDP is expected to grow by 7.9% in 2021. And Nikkei’s survey with 35 economists shows a bolder prediction that the country’s GDP will increase by 8.2% this year, marking a record high in 10 years. 

China’s economy has posted a strong rebound after the pandemic was generally put under control, while such a recovery story has not been seen in other major economies. “Last year the economy recorded around 2.3% GDP growth and is expected to further strengthen to at least 8% growth in 2021. So we are looking at a very robust economy,” Lai notes, highlighting that a V-shaped recovery is observed in all the country’s major data points that Franklin Templeton tracks.

“Both the supply side and the demand side have been extremely robust since the second half of last year,” he says. “More importantly, from my perspective as a stock picker, I have always been amazed during my 30-year career in terms of the opportunities that the Chinese equity market has presented to myself and investors, whether it be onshore, offshore, or unlisted companies,” Lai says, noting that the depth and the width of the market have expanded. 

With all these opportunities coming up, the proposition of making China a standalone asset class again comes to fore. “China is relatively unique because it does not follow a liberal democratic Western policy script and also there are tremendous opportunities from a bottom-up perspective,” Lai comments.

“It would make sense to treat China as a separate asset class, just like how we treated the US 30 years ago,” he notes, adding that there are other similar practices like creating the Asia-Pacific ex-Japan and Europe ex-UK mandates. 

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