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Interest turns to China’s new economy plays

As China's economy slows, fund houses are betting on growth opportunities in the emerging consumption and services economy.

For the first time, China’s consumer consumption and services accounted for more than half of GDP growth, which was revealed in the latest economic data. Among the sectors that some fund houses believe will benefit in the new economy are social security, financial and healthcare.

The Chinese health insurance market is growing as consumers increasingly turn to the private sector to fill in the gaps left by inadequate health schemes, Ernst and Young noted in recent report. According to EY, Ping An Health this year was signing up to 300 to 500 new customers per day. 

Nintin Dialdas, CIO of Mandarin Capital, told Fund Selector Asia that with the Chinese government promoting a loosening rate cycle, insurance equities could see a rally as their ongoing burdens and targest ease with lending and reserve requirement ratio rate cuts. 

Looking at three-year performance, the top five Chinese equity funds hold significant exposure to the financial sector. All five funds have realised returns of over 40%. One of China’s blue chip companies, Ping An Insurance Group, was in the top five holdings of four of the funds.

A look at the top five performing Chinese-equity funds over the trailing three years:

Confidence in the insurance sector is high among fund houses as President Xi Jinping has repeatedly demonstrated his commitment towards building a “xiaokang shehui” – more commonly known as a “moderately well-off society” – by 2020.

His philosophy is to grow China into a society where the bulk of its citizens can reside in a comfortable middle-class lifestyle. Topping President Xi’s priority list is social security reform – he aims to expand medical insurance and pension schemes and abolish the one-child policy.

President Xi’s campaign, though in its early days, is already yielding results. A report from Credit Suisse released this month shows that the expanding Chinese middle class has this year overtaken the US to become the world’s largest.

PineBridge Investments noted last week that “President Xi’s admninstration has already rolled out a number of policy initiatives to stabilise the economy and reduce the chance of tail risks as it shifts away from its traditional investment-driven growth model, towards one that where services and consumption takes a greater role”.

“Many investors remain concerned that China could suffer a hard landing, although our view remains that a sharp slowdown of the Chinese economy is unlikely,” PineBridge Investments said.

Banking and insurance sectors could also offer opportunity during the ongoing economic transition. HSBC Private Bank noted earlier this month that Chinese banks are trading way below book value on what it thinks are overblown fears over asset quality as the economy slows. 

Oversea Chinese Banking Corporation said that growth in the Chinese consumption and services sectors have managed to offset the impact of slowdown in old growth engines – such as industrials.

“As a result of transition, the services sector continues to gain shares in China’s GDP component, accounting for 51.4% of GDP in the first three quarters,” OCBC noted.

Part of the Mark Allen Group.