For all its spectacular growth in the last decade, China has
an economy in rapid transition from an export-driven
economy to one driven by internal needs and demand. Investors
who can recognize the change and act on it now may benefit even
more than China investors in 2009, when the countrys
economy grew by 8.7 percent and its gross domestic product
total was $4.9 trillion.
Our analysis suggests that Chinas outperformance
is poised to continue and we remain overweight China,
says Richard Ross, global technical strategist with Auerbach
& Grayson, a New York brokerage firm that specializes in
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China is the worlds most populous nation and the
largest player in the BRIC (Brazil, Russia, India and China)
universe. Its GDP growth is among the fastest of the
worlds major economies. Its a nation that has built
its growth without the kinds of leverage that has been so
characteristic of growth of western economies. And its trade
surplus of $3 trillion is causing many to see it as the next
global superpower, eclipsing even the US.
The global economy now is bifurcated between the emerging
markets and the developed markets, with more and more assets
equities and fixed income being allocated to the
emerging markets. Morgan Stanley, for example, expects the
inflows into the emerging markets to exceed $1 trillion
annually. Given the extent to which this is likely to
lead to foreign exchange reserve accumulation, this trend to a
strong pull upwards for emerging market assets, writes
Morgan Stanleys Rogerio Oliveira. What country is the
greatest beneficiary of this asset allocation? China.
Still, there is also a lot of bearish sentiment that has
suddenly overtaken the optimism surrounding China. Inflation in
China could undo many of the strides that the economy has made,
the bears say. They point to the slowing down of the economy
and to the housing bubbles that are about to burst.
The recent purchasing managers index, a key gauge of
manufacturing growth fell to 52 in May, down 0.9 from 52.9 in
April. While the drop is an indication that the economy is
slowing down, the economy is still in an expansionist mode,
analysts point out. The slowdown only becomes worrisome if the
index drops below 50. And that may be a long way away.
What you are seeing is an economy in
transformation, says William Kaye, senior managing
director of the Pacific Group, a Hong Kong-based investment
manager. Chinas growth has been driven by its exports.
But as the global economy flounders, and growth slows down,
China is looking internally to continue the growth. It plans to
control its own destiny.
Kaye, who has been investing in Chinese companies and firms
with significant China exposure since the 1990s, points out
that China works top down. In recent months, the Chinese
government has managed to keep interest rates up, force the
banks to reduce their lending and introduce laws to cool down
the housing market.
There also is an attempt to shed its image as the low-cost
provider of labor, notes Kaye. Until now, the Chinese have been
willing to subsidize labor costs to provide low-cost
manufacturing facilities to foreign companies. Now they are
quite willing to withdraw those subsidies and let the plants
close down. Stricter minimum wage regulations and a willingness
to shift some of the manufacturing to meet domestic demand also
means that some of these low labor cost manufacturing may have
to shut down. What you are seeing is not an economy in
trouble, but a reallocation of resources, says Kaye. And
that doesnt always sit well with some analysts.
The new growth in the economy will be driven by
enormous government investment and spending on
infrastructure, says Robert Raucci, a managing partner of
Newlight Associates, a New York investment firm. And the
domestic industrial infrastructure power generation,
clean energy, water processing is the most likely to
But theres also been a fundamental change in what the
Chinese citizens earn and where they live. More than 600
million live in Chinas cities, and as many as 500 million
have been lifted out of poverty. Not only is there an increased
demand for food but also for different kinds of food. The
nature of Chinas consumption is changing, says Raucci.
And that means that the technology sector wireless,
software, semiconductors will also be a major
There are pitfalls. The Chinese seem to have little respect
for intellectual property issues or, for that matter, financial
disclosure and transparency. In recent months several exchanges
have barred trading in Chinese companies because of alleged
irregularities and less than complete disclosures. In January,
the Hong Kong exchange suspended trading in China Forestry
after its chief executive was arrested for alleged embezzlement
of $4.6 million. Subsequently, other exchanges including NYSE
and Toronto have suspended trading in more than a dozen Chinese
companies that are said to be in violation of disclosure
Some of these problems are symptomatic of growth markets,
especially where companies issue a surge of listings to take
advantage of investor interest. But these are inefficiencies
that can produce attractive investments if investors are
willing to act locally, take time to understand the environment
in which these companies operate. Think local, act
local, says Raucci.
China is still a compelling story, says William Kaye.
It is still the country that accounts for most of
todays global growth. And what passes for problems
may well be part of a plan to reallocate resources against the
conventional thinking. Youre looking at a country that
has gotten so far based on exports and now has decided to take
a different direction. That direction may make investing in
China even more attractive than the past.