Chinese Evolution

The strength of emerging market economic growth this century has been well documented, as has the shift, broadly speaking, from commodity and manufacturing based economies to ones more supported by shifting demographics and the burgeoning middle class, which has been central to supporting domestic change. The current MSCI EM index is heavily skewed towards China and its immediate Asian neighbours, representing a combined weight of 56%, and one would be hard placed to argue against their importance to the global economy.

In more recent years, Chinese growth has been driven by increased domestic wealth, technological innovation, entrepreneurship and, of course, infrastructure spending. This has all been further supported by financial reform and involvement at the highest political levels. A more recent structural reform is the opening up of China's A-share market to foreign investors via the Hong Kong - Shanghai and Hong Kong - Shenzhen 'Connect' initiatives. This 3,000 plus stock universe was previously unavailable to the majority of international investors and could prove to be a rich hunting ground for investors seeking access to successful domestic-based companies.

The Chinese stock market has long been renowned for the dominance of state-owned enterprises (SOEs) but, more recently, technology companies, the likes of Tencent and Alibaba, have overtaken these, to become the current largest corporations in China. These two companies have led the emerging market rally over 2017 thus far (to 6th October), contributing 9.2% and 8.2%, respectively, to total MSCI EM performance. The Chinese government is said to be pushing for a 1% stake, and therefore a direct role, in Tencent and Alibaba's video content firm, Youku Tudou. While these, along with search engine company Baidu and others, have recently agreed to invest in state-owned telecoms operator, China Unicom. The line between state and private may therefore become less clear.

Despite the strong secular growth story, the high level of total debt and growing private sector loans has been a clear warning signal to many investors. However, economic growth continues and the region still offers access to some new and interesting companies that may prove worth the potential risk.