Stephen Jen: The timing of the return of ROI-China could not be better.

China has finally turned the corner. China's economy has finally turned a corner, five years after Beijing started cracking down its bloated real estate sector. It is now on a more sustainable path, anchored in quality growth. The correction left fewer scars that many had feared. China's real estate sector has been in a "bear market" since 2021. Prices have fallen by 40 to 50 percent on average. It was not accidental. Beijing's "three red lines" policy in 2020 was designed to curb a property bubble that had ballooned. It clamped down heavily on leverage. The Chinese economy may be hampered by weakness in the construction and ancillary industries for the next year, but it seems that the correction of the property market is nearing its bottom. Shanghai's secondary market property prices have started to increase, and the pace at which home prices are falling has eased again in March. The worst price contraction was recorded in late 2024.

It's amazing that so few things have broken in China, given the magnitude of the deflation on the Chinese property market. It was a stark contrast to the doomsday forecasts that the correction in China would be similar - or worse - than what happened after Japan's property market peaked 1989. In Japan, the property prices dropped by 80% since their peak. In 1997, the banking industry was hit by a crisis. After aggressive money printing from the Bank of Japan, and massive fiscal stimulus by the Ministry of Finance, the economy fell into deflationary spiral that took 25 long years to stop. According to the IMF's World Economic Outlook, Japan has had a flat dollar GDP per capita since the 1990s. According to this measure, Japan dropped from third in the world, in 1995, to number 32 now, behind Czech Republic.

China was more vulnerable to its property crisis than Japan, according to popular opinion in 2021-22. This is because China wasn't yet wealthy when it imploded. Many were concerned that a shock would trigger further breakdowns in the financial and economic system.

It's not what happened.

China has managed to grow its real GDP by 5% annually, despite a contraction in the property sector.

Beijing also used this difficult period to change its policy goal from maximising its economic growth to improving its quality. China's nominal GDP growth was between 10% and 11% in the decade prior to the COVID-19 outbreak. Since then, the growth rate has slowed by 2 to 3 percentages points.

This decline might seem alarming, but in reality it is a sign of a shift towards a more sustainable growth model.

QUALITY OVER QUANTITY

China's GDP no longer depends on the housing boom, but instead is sustained by activities that support China's development. The Chinese government is pursuing dominance in the fields of artificial intelligence, high-tech manufacturing, and alternative energy.

China has made significant progress in creating an industrial eco-system that is self-sustaining. It is due in large part to the "Made in China 2025", which has allowed it to move up the value-chain.

China, which is both fast and hefty, can now compete with European and American rivals on high-value products like electric cars and robotics.

This is largely due to two important strategies. China's first strategy is a rapid imitation/innovation. It uses its army of scientists, engineers, and mathematicians (STEM) to imitate whenever possible, and innovate when necessary. It does this very quickly. The product cycle for Chinese automakers, for example, is twice as quick as their European counterparts. Chinese automakers produce new models in 1.5 to 3 years, while European manufacturers take 4 to 6 years.

China's 80/20 strategy is next, which achieves 80% of cutting-edge technologies at only 20% of the price. China has been able to move up the value chain and maintain a competitive price. Look at DeepSeek. It was a surprise when the AI large-language model (LLM), released in January 2025, performed better than American competitors. But it did so at a fraction the cost. The 80:20 is similar to the drafting used in cycling. China is comfortably behind the leader, America. China is almost as fast, but it is saving its energy to use later.

Good timing

There are, of course, still reasons for concern.

China is still struggling to generate enough domestic demand, and fierce competition at home has reduced profit margins.

Exports still provide Chinese producers with large profit margins.

BYD for example makes $440 on average per vehicle sold in China. According to China's largest brokerage CITIC Securities, its profit margin outside China jumps up to $3,000 for each vehicle.

The trade tensions between China and the United States are also a source of concern, since they have restricted China's ability to access the largest export market in the world. China's exports have increased significantly to other parts of the globe, including Asia, Europe, and emerging markets. The rivalry between the U.S. and China isn't all bad. It has helped China to advance in technology and to adopt new technologies.

The timing of China’s recovery was also fortunate. Investors who are heavily exposed to the U.S., on average, could be worried about America's unpredictability in geopolitics and fiscal issues and may want to sell some U.S. assets. This capital will require a place to live.

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(source: Reuters)