International Monetary Fund (IMF) recently warned that China is on a seemingly dangerous path if it continues to let its debt build up within its economy. For investors, the dilemma is real.

Is it time to avoid China and place your investments in other markets?

Yet, according to CIMB Research, the fear of mounting debt within China is an opportune time to invest in China. CIMB Research believes that there are five strong reasons why now might be the time to invest in China.

1. Chinese economy recovering

The first reason is the improving fundamentals within the Chinese economy. CIMB Research notes that the recent bull cycle in China is mainly driven by fundamental improvement.

China has been a key beneficiary of the global economic recovery, leading to stronger export growth and better-than-expected property sales and investments.

Consumption trend within the Chinese economy has also been robust thanks to stabilised income growth and potential wealth effect from property prices.

2. Chinese debt level easing

overall leverage

Despite the warning from IMF, CIMB Research believes that China’s structural overhang is “easing”.

According to the data from the Bank for International Settlements (BIS), China’s overall upward leverage trend visibly slowed down in 2016.

In addition, Chinese corporate leverage also peaked in 2Q16 and has since slowed down.

bank's npl ratio

Non-performing loans ratio has also been improving and edging lower.

3. Industry consolidation helping to weed out competition

In the past several years, a number of industries have been undergoing voluntary consolidation as smaller companies were unable to survive in the market downturn.

The government has also been implementing supply-side and SOE reforms to consolidate some of the underperforming industries.

The phase of consolidation has led to a strengthening of markets leaders’ market share and its ability to increase profitability.

4. Attractive valuation for Chinese market

valuation

CIMB Research also takes a positive view on the current valuation of Chinese equities. In the eyes of CIMB Research, the Chinese market still holds a reasonable valuation.

Although valuation has been increasing, it is still reasonably priced when compared to historical data and compared to other emerging markets.

CIMB Research believes that there are hardly any signs of overheating as of now.

5. Demand for Chinese equities will remain strong

Based on data gathered by CIMB Research, the ownership of offshore Chinese equities by both global and domestic investors continue to be relatively low.

As such, CIMB Research expects continuous fund inflows into offshore Chinese equities in the coming months, which will keep demand for Chinese equities strong.

CIMB Research’s Preferred Sectors In The Chinese Market

Among the Chinese equities, CIMB Research warned investors to cut holdings in property, capital goods and energy sectors, while banks, IT, insurance and telecommunications are their overweight sectors.

China Construction Bank

In particular, CIMB Research highlights the banking sector as one of their top preferred sectors and undervalued sectors that allow investors to catch China’s cyclical recovery.

Generally, better macro economic factors would benefit banks’ business and credit demand.

Moreover, there could be a potential net interest margin expansion as the People’s Bank Of China (PBOC) is expected to keep the overall interest rate at relatively high levels amid such economic growth momentum.

Top Picks: China Construction Bank (TP HK$7.60), ICBC (TP HK$6.30)