27 October 2016
Investors may see opportunities in the stock market as the Chinese economy transforms to a consumption-driven one. Photo: Reuters
Investors may see opportunities in the stock market as the Chinese economy transforms to a consumption-driven one. Photo: Reuters

How to tap the opportunity of China’s economic transformation

China’s economic restructuring has entered its most critical phase, and the authorities need to deepen reforms in key areas, remove barriers and rebuild the framework.

There will be various challenges and tough times going forward.

That creates rare investment opportunities for investors, as well as volatility and fluctuations.

Investors have to stay positive and vigilant and look for ways to profit from the changes.

(1) Identify the winners and losers

Simply speaking, go long new-economy stocks, and short old-economy plays.

In fact, that has already become a new market consensus among Chinese fund managers.

The strategy will continue to work for another one to two years.

The market is poised to consolidate.

Powerful companies will grow bigger from mergers and acquisitions, while less-competitive ones will be phased out.

It will be the same even in old-economy sectors with excessive capacity.

Those who survive from the shake-out will have greater pricing power, higher profit margins and more financial and human resources to invest in research and development and technological upgrading.

(2) Ride through the market’s ups and downs

The economic restructuring will be a bumpy journey.

Investors will either underestimate or overestimate the economic situation, and they will sometimes be optimistic or pessimistic about the medium- and long-term economic outlook.

The rate of economic growth, macro policies and reform measures will all affect market sentiment and expectations.

And the subsequent market ups and downs will create good opportunities for investors, in particular hedge funds.

(3) Watch closely for the spill-over effects of the economic restructuring

China is already the world’s second-largest economy, and any of its moves or shifts will have considerable impact on other parts of the world.

As China moves its manufacturing sector up the value chain, high-end manufacturing firms in South Korea, Taiwan, Japan, the United States and Europe will face enormous pressure.

The spill-over effects of China’s economic restructuring will be felt in global financial markets, creating various long/short opportunities.

(4) Watch out for an across-the-board “market reset”

If China needs to succeed in its economic restructuring, excessive capacity has to be cleared out.

That would be a painful process, accompanied by massive bankruptcies and closures.

And it would also create bad loans and a rising unemployment rate.

These would ripple into the broader financial system.

However, that’s the only way for the country to complete the restructuring process.

And a “market reset” will create huge or even unprecedented volatility for financial markets, which will bring rare opportunities for some investors.

(5) Cultivate the capability to ride through different cycles

As China goes through the “market reset” phase, it will manage to shift to a track of medium but high-quality growth.

And it could possibly overtake the US as the world’s largest economy by 2023.

However, investors have to be firm and confident and capture the bottom-fishing opportunities during the “market reset” period.

In doing so, they have to cultivate their capability to ride through different cycles, so as to save enough ammunition for the bottom-fishing feast.

This article appeared in the Hong Kong Economic Journal on April 22.

Translation by Julie Zhu

[Chinese version中文版]

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Chairman of Deepwater Capital Limited; Vice Chairman of the Chinese Financial Association of Hong Kong

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