Why China is not for the faint-hearted
Mar 15 2010 by Fiona Newborough, The Journal
Share Watch with Fiona Newborough
THERE is no denying that China is playing a lead role in the global economic recovery. Although the country is notorious for its lack of transparency and therefore the reliability of data can be dubious, the latest figures show that GDP growth accelerated from 6.2% in the first quarter of last year to 10.7% by the final quarter.
The speed of the rebound has largely been due to the immense amount of fiscal stimulus (approximately $586billion) provided by the Chinese government.
The Chinese authorities have been determined in pushing the domestic economy in order to reduce the nation’s reliance on imports.
The transition from a rural economy to an industrialised one is clearly underway as China expanded by an impressive 8.7% in 2009 and consensus forecasts point to a figure of 9.8% growth in 2010.
Equally, although China’s dependence on imports is becoming less, the CIA (Central Intelligence Agency) has estimated that China will have overtaken Germany as the world’s largest exporter in 2009 with exports accounting for 9.9% of the world’s total.
Despite being such a heavyweight in global economic terms, China is only the 9th largest country by market capitalisation representing just 2.2% of the MSCI AC World index.
It is statistics like these that make for a compelling investment story as it would seem likely that as industrialisation continues, we are likely to see an influx of companies coming to the market; manufacturers are likely to feature given the emphasis on infrastructure and urbanisation.
However, investing in China is not for the faint-hearted. The political environment is a communist one meaning that the government has considerable influence over the private sector and the banks are state owned.
Therefore, the fortunes of private companies are, to an extent, at the mercy of the authorities.
Additionally an inherent characteristic of emerging market investment is volatility; equity markets react strongly to newsflow although the long-term prospects may remain unaltered.
A challenge currently facing the Chinese government is how to balance economic growth and inflation; authorities have already attempted to rein in lending this year by twice raising the level of reserves that banks must set aside.
February’s inflation figure came in higher than expected sparking debate that the government would be under further pressure to tighten monetary policy in order to prevent the economy from overheating.
Long term, growth investors who wish to obtain exposure to the Chinese market can do so via a number of routes.
There are an increasing number of Chinese investment funds as well as Exchange Traded Fund’s on the market.
Alternatively some investors may simply wish to invest in UK listed companies with operations in China or linked to the Chinese economy. Whatever the preferred choice of investment vehicle, if investors are interested in investing in China we would strongly recommend seeking professional advice.
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