Executive Summary:

  • We believe China’s economy is healthy and will continue to dominate year over year global GDP growth market share in 2015.
  • We believe total GDP value in U.S. dollar (USD) terms relative to other countries is a better way to assess China’s economic performance vs year over year GDP growth percentage.
  • We believe there are three tactical investment opportunities that align with China government policy. China’s Internet Plus Strategy, state owned enterprise mergers & acquisitions (M&A) activity and Renminbi inclusion in the International Monetary Fund (IMF)’s currency reserve basket.

There has been a lot of talk about China’s slowing economy stemming from a lower 2015 GDP growth percentage target. This year’s target is 7%, which is down 0.4% from last year, and a far cry from its ten-year peak of 14% in 2007*. To the casual observer the shrinking growth percentage may suggest a grim outlook for the future of the world’s second largest economy. However, the current growth percentage reflects neither the exponential historic growth that has already occurred in China, nor the massive growth in absolute dollar terms that is still occurring there. When investors assess the state of China’s economy, we believe there are better metrics to measure its growth.

China’s GDP is over $10 trillion and is on course to add almost $5 trillion more over the next five years according to IMF forecasts*.

The IMF forecasts that China will continue to be the largest contributor to global GDP growth from 2014 to 2015. The IMF predicts China will contribute 24% to the growth of the world economy in 2015; 2% more than the United States*.

Due the current size of China’s economy, the prospect of a double-digit GDP growth rate is now mathematically unrealistic. If we apply a 3% annual GDP growth rate to the U.S.’s GDP and a 10% annual growth rate to China’s GDP, China’s GDP would surpass that of the U.S in 7 years, and be nearly 25% larger by 2025.

We believe this is an unlikely scenario and that China’s GDP growth rate has to slow down.

Three tactical investment opportunities that align with China government policy:

We believe that “co-investing” with the Chinese government, or investing in alignment with China government policy, can be a smart way to leverage China’s capital markets. During the National People’s Congress (NPC), held in March, government leadership announced several policies that are pertinent to investors. In Q2 2015, we like three investment themes and encourage investors to consider emerging market or China-only fund allocations with these exposures; (1) the China Internet Plus Strategy, (2) China state owned enterprise M&A activity and (3) Renminbi inclusion in the IMF’s currency reserve basket.