Together with globally recovering commodity prices, this finally helped to turn around five years of strongly falling producer prices. Chinese producer prices have therefore notably risen, which has helped to drive profits higher and let companies process their debt burdens more easily.
At the same time as the old low productivity sectors were scaled back, China has focused on rapid progress in technology, which boosts productivity gains.
China is now a leading recipient of patents worldwide and has made strong gains in university education levels. The sectors that China is making particular progress in are artificial intelligence (AI) and FinTech, on the back of the improved education situation (science and engineering graduates), more research and development spending, plus availability of capital.
As economic restructuring and corporate sector reforms mean higher efficiency, this could create higher profits and potentially increased returns on equity.
Technical factors
Currency volatility meanwhile, which was a destabilising force until recently, has calmed down and capital outflows have turned around, which has been mirrored in foreign exchange reserves rising again.
These macroeconomic developments should increase the stability and robustness of the economy to external shocks. Inflation is also steady and at moderate levels.
Also, there is one technical factor that should boost demand for Chinese equities, and that is MSCI’s plans for A-share inclusion in their indices, most notably the MSCI Emerging Markets Index.
According to index provider MSCI, approximately 450 large or mid-cap A-shares – domestic Chinese stocks listed on the Shanghai and Shenzhen stock exchanges – could be included in the MSCI.
Emerging Markets Index in the future, implying total inflows of $340bn (£245.6bn) into the index by August 2018. The inclusion of A-shares by MSCI could thus be a catalyst for further outperformance by Chinese blue chips.
There are also other initiatives on the horizon that are worth keeping an eye on. For example, taking inspiration from the ancient Silk Road trading route, China's One Belt One Road (OBOR) initiative hopes to link more than 65 countries, encompassing up to 40 per cent of global GDP.
The OBOR initiative embeds two core economic policy objectives: one to promote trade and the other to promote development through co-operation on infrastructure projects.
High corporate sector debt weakness to watch
One risk factor to consider is debt levels. The ratio of China’s total debt-to-GDP was 258 per cent at the end of 2016, a high level given China’s stage of economic development.
However, at the central government level, debt is not an issue, around 38 per cent of GDP.
