Regular readers of The Switzer Report will know that Hong Kong listed Chinese equities (“H-Shares”) have been our most significant single bet in terms of geographic positioning for the past 12-months and that H-shares currently comprise around 45% of the AIM Global High Conviction Fund. Given we have just returned from a week in Beijing, it’s timely to recap some high-level thoughts on the state of the Chinese economy and equities markets.
During our visit to China, we met with 20+ corporates, macro advisers, and Chinese government officials. It would be hard to describe the mood in Beijing as anything other than buoyant. The Chinese economy is enjoying its best period of growth in six years.
One measure that does a decent job of tracking the state of the Chinese economy is the Li Keqiang index. Named after Chinese Premier Li, this index tracks the year-on-year change in bank lending, rail freight, and electricity consumption. This simple dataset is much easier to assess in real time, and therefore less prone to “manipulation” than official Chinese GDP data. In the chart below we have plotted China’s official GDP growth (in Red) versus the Li Keqiang Index (in Blue). While official GDP data has shown steady growth of 7-8% pa over the six years, the Li Keqiang index tells a different story. It shows a distinct cycle of very poor growth in 2014/2015 followed by a very healthy expansion over the past 18 months. While many expect this growth to moderate next year, we believe the economic environment will continue to be positive, particularly given the likely strength of the export sector adding another leg to China’s growth story.