Investment Adventures in Emerging Markets


Recovery road map in the year of the dragon

The upcoming lunar year features the dragon in the Chinese Zodiac. It is recognized as one of the most auspicious signs, incorporating luck, strength and health. People born under this sign are viewed as strong, generous and full of vitality. Strength has been noticeably absent in China’s equity market over the past year, with the market under significant downward pressure due to weakness in the real estate sector and slower consumer spending.

Acknowledging the challenging market environment over the past 12 months, we have developed a four-point policy plan. This can be viewed as a road map for sustained recovery in China’s economy and equity markets in the year of the dragon.

New growth drivers to replace real estate investment

The challenges faced by oversupply and weak demand in China’s real estate sector have been well documented. China’s policy of “real estate for living as opposed to speculation” has arguably been too successful. Companies have entered bankruptcy and debts are being re-negotiated. While a swift rebound is unlikely, investors may not be exposed to additional bad news.

China’s real estate value chain accounted for as much as 29% of gross domestic product (GDP)1 at its peak. There is a clear need for new growth drivers to replace this sector in order to achieve a meaningful recovery and sustain long-term growth in China.

New growth drivers we have identified include the electrification of transportation and growth in its supply chain, import substitution of advanced technology hardware, and green energy solutions. Nevertheless, more policy action is required to create additional growth drivers, particularly for household consumption, which at 38% of GDP2 remains significantly below emerging market peers.

Widen the social safety net

There have been attempts to reform China’s social safety net and address its underlying weaknesses, including addressing health care costs through drug price reform, and the expansion of state pensions to rural residents. However, implementation of national policies are the responsibility of provincial governments who may not always have the funds required.

The state portion of China’s three-pillar pension system is running a deficit in a third of provincial level jurisdictions. The Chinese Academy of Sciences forecast that the state pension system will run out of money by 2035.3 This is creating uncertainty, leading to higher precautionary savings amongst the one billion participants in the state pension system.4

The weak social safety net is often cited as a contributing factor to China’s falling birth rate. State policies to effectively address the structural weaknesses in the provision of health, education and pensions could go some way to incentivizing more people to have children.

We are not arguing for the creation of a welfare state, rather a widening of the social safety net. This could lead to a reduction in precautionary savings, increased employment opportunities in health and social services, and ultimately increased consumption.

Clearer regulation with more effective communication of regulatory changes

One of the biggest policy challenges in recent years has been poor communication of regulations and reversing those that are deemed too aggressive by the market. The negative impact of this “two-steps forward, one-step back” policy implementation is significant, and it demonstrates the need for greater consistency and clarity for the market.

Increased communication with industry associations and feedback sessions with investors can mitigate the risk of reversing regulations that are deemed too aggressive. Establishing consultation periods for proposed regulations can also give investors more time to digest and adapt, as opposed to react.

Improved corporate governance

Addressing weaknesses in corporate governance is not exclusive to China, as both developed and emerging markets can benefit from increasing protection for minority investors. For China, ways to improve corporate governance include improved communication. For example, the absence of information when executives are detained increases uncertainty and puts downward pressure on share prices.

In addition, increased transparency regarding pledged shares amongst company founders and the same group’s clear plan for divestment, which can be adjusted as circumstances change, could lead to improved confidence amongst investors.

Investors also have a role to play in improving corporate governance. The Asian Corporate Governance Association (ACGA) has cited greater clarity on the role of independent directors, improved disclosure and adhering to regional best practice as amongst the factors they would like to see enhanced.5 On a positive note, China’s score in the ACGA 2023 survey increased slightly, although it remains in the lower quartile of country rankings.

Driving long-term change

We acknowledge the year of the dragon may still pose challenges for China’s equity market. Our road map is focused on improving the long-term outlook for the market as opposed to quick fixes. In our view, raising the share of consumption as a share of GDP through the policies and reforms we outline as well as improved regulation and corporate governance should help create a solid foundation for a sustained recovery in China’s equity markets.



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Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

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1. Source: Rogoff, Kenneth S. and Yan, Yuanchen. “Peak China Housing (NBER Working Paper 27697).” NBER, August 2020.

2. Source: CEIC. December 2021.

3. Source: “Why are there concerns about China’s pension system as its population age?” Reuters. January 18, 2024.

4. Ibid.

5. Source: “Corporate Governance Watch 2023: A new order.” ACGA. December 2023.

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