Jian Shi Cortesi, investment director for Asian and Chinese equities at Zurich-headquartered asset manager GAM Investments, discusses the transformation of the Chinese economy, and highlights how the newly-proposed EU tariffs on Chinese electric vehicles are not enough to take away the cost advantage of China’s BYD cars in Europe.

Despite enduring a bearish trend for about three years, Jian Shi Cortesi at GAM Investments believes that the potential for further decline for China is relatively limited.

“The market is ripe with upside potential. However, the realisation of this potential hinges on the emergence of a catalyst to propel the market upwards,” Cortesi said in a note. “The anticipation is for a trigger that will unlock the value and drive a positive shift in the market trajectory. The market is already simmering, but needs to be fuelled to reach a full boil.” 

Property market stabilisation
Despite the minimal exposure of many Chinese companies to the real estate market, the sector's troubles have broadly impacted perceptions of Chinese equities.

“It is important to differentiate the current situation from the 2008 US financial crisis. The Chinese banking system has shown resilience, with the challenges primarily concentrated among developers rather than stemming from mortgage defaults,” Cortesi continued. “The defaulted loans represent a minor portion of the banks' total loan portfolios and are generally secured by significant collateral, providing a safeguard for the financial institutions.” 

“While the property market may not be heading towards a crisis similar to the 2008 meltdown, it is evident that transactions and construction levels are expected to be lower, potentially impacting GDP growth,” she added. “The government's actions have contributed to the stabilisation efforts. These steps have been incremental, reflecting a cautious yet proactive approach to managing the property market's health and ensuring the stability of the broader financial system.” 

Transition in the composition of China’s GDP growth
Cortesi sees a multifaceted shift in China's GDP growth for 2024. “Digitalisation emerges as a pivotal force, anticipated to bolster GDP by an estimated 3.3 per cent. The pivot to eco-friendly energy sources, encompassing solar, wind and electric vehicles, is forecasted to yield an additional 1.7 per cent,” she continued. Meanwhile, consumer spending, notably in the realms of travel and dining, is expected to contribute 0.4 per cent, with other sectors collectively adding another 0.7 per cent. “In stark contrast, the real estate domain and its associated industries are exerting a 1.4 per cent drag on GDP growth,” she added.

In 2024, the International Monetary Fund also recently upgraded China’s growth forecast to 5 per cent from 4.6 per cent, after a strong first quarter, and to 4.5 per cent in 2025

BYD is revolutionising the EV space
Cortesi highlighted that BYD is standing out as a force in the electric vehicle (EV) industry, not only within China but also on a global scale. As the world's largest EV seller by volume, BYD offers a diverse range of vehicles, from basic models starting at $9,000 to premium options priced at $300,000. Its product lineup includes both pure electric and hybrid cars, providing consumers with the flexibility to choose according to their preferences.

This year the firm introduced a hybrid car which can travel up to 2,000 kilometres on a tank of petrol, equivalent to the distance from New York to Miami, with a starting price of $14,000. “This pricing strategy positions BYD's hybrid and pure electric cars as more affordable alternatives to traditional fuel-powered vehicles, which is likely to further drive EV adoption in the Chinese market,” Cortesi said.

“BYD's 43 per cent increase in sales volume in China last year, at the expense of competitors like Volkswagen, Toyota, Honda and Changan, underscores the shifting dynamics in the automotive industry,” she said. The rise of local brands with technological advantages in EVs is reshaping market shares, particularly in the Chinese car market, which accounts for a third of global car sales annually. “BYD's scale in China not only solidifies its domestic market share but also provides a springboard for international expansion. The company's scale advantage facilitates its entry into export markets,” Cortesi continued.

Cortesi believes that the newly-proposed EU tariffs on Chinese EVs are not enough to take away the cost advantage of BYD cars in Europe. The EU decided to impose provisional tariffs of between 17.4 per cent and 38.1 per cent on electric vehicle imports from China, about half the US’s 100 per cent tariff, in response to what it calls illegal state subsidies. These new European tariffs are on top of the current 10 per cent rate, and come after the US quadrupled tariffs on Chinese EV imports to 100 per cent last month.

Nevertheless, Cortesi doesn’t expect Europe to be a major revenue contributor to BYD. BYD’s major export opportunities are in regions without strong domestic car brands, such as Australia, Israel, Russia, the Middle East, Latin America and Southeast Asia.

Her views have been echoed by Maggie Sun, senior portfolio manager at Japan’s Sumitomo Mitsui DS Asset Management, who also thinks the overall impact to Chinese EV makers is quite manageable as the anti-subsidy investigation started in September 2023 and a majority of the headwind impact is already priced in the share price. "Meanwhile, many Chinese EV makers have already accelerated their localisation strategy which in the longer term will further mitigate the tariff or other trade conflict risks," Sun said.

However, Sun highlighted that the duty affects Chinese carmakers BYD, Geely and MG owner SAIC differently: "Despite facing tariff pressures, BYD and Geely can still maintain a positive sales momentum and limited profit impact through strategic discounts." 

Dina Ting, head of global index portfolio management at Franklin Templeton, also believes that over the long term, it seems unlikely that the EU tariffs will halt China’s market share claims in Europe. See more commentary here. 

The simmering transformation
Cortesi believes that BYD's trajectory in the EV industry is a testament to China's broader policy goals. The government's broader policy is steering away from an over reliance on real estate, a sector that is not viable for indefinite growth; instead, it is directing efforts towards the development of clean energy and digitalisation. “There is a substantial domestic drive for technological innovation, particularly in digitalisation, artificial intelligence and autonomous driving, all of which are strongly supported by the government,” Cortesi said.

Although it is difficult to predict an exact timeline for the transformation underway in China, Cortesi believes that it is building a foundation for future economic growth, and the impact will manifest in the coming years.

Despite China's slowing economy and trade tensions, Sun is also optimistic about the country's outlook. She believes that Chinese equities are attractively valued. “The worst is now behind China, even if the property market might take longer than expected to recover significantly,” Sun told this news service.