But the start of the year has seen economic growth figures slide once again.
The IMA China/Greater China sector is the worst performing IMA sector bar Global Emerging Markets over the past three years with the average fund falling 7.5%. Funds within the sector had started to do far better within the past six months, outstripping their global emerging market peers and even some developed markets, including Japan and the US.
Positive government action
Some of the concerns over China's indebtedness and the future direction of its economy were receding. The Government was taking action to get the debt burden under control and the country's restructuring towards a more consumer rather than infrastructure-driven economy appeared to be progressing. Multi-managers, generally negative towards emerging markets, were sufficiently convinced to develop a taste for dedicated China funds.
Fund management groups once again grew enthusiastic about the prospects for the region. Swiss & Global launched the JB China Evolution Fund, investing in China’s “new economy” and sectors such as technology, healthcare, environmental protection and the broad consumer space.
Deutsche launched a new China-focused ETF. It looked like investment opportunities might once again emerge in China.
Start of a downward spiral?
But this year, it has started to go wrong again. First, Chinese manufacturing data was lower than expected. Activity still grew, but at a slightly slower pace than in the previous month. This was followed by weaker services data: the HSBC-Markit Chinese service sector PMI data for December disappointed, coming in at its lowest level since August 2011.
China funds are once again languishing at the bottom of the performance tables, with the average fund in the IMA China/Greater China sector down 3.5% over one month. This is at a time when UK and European markets are up by between 3% and 5%.
So was the brief resumption in optimism about China simply a blip? The conclusion of many economists is that China's structural reform programme will inevitably weigh on growth, but will benefit the country in the long term. For example, Peter Langerman, chief executive officer at Franklin Templeton, says: "We view recently proposed structural reforms by China’s government as a long-term positive for the country’s economy and capital markets, but we also realise that such measures may initially exert a drag on economic growth."
Chinese realism
Those investors still expecting 8% growth from China may be sorely disappointed as the country revises down its growth estimates to more realistic levels. But relatively few market participants are now expecting such strong growth from China, and after three years of declines in China-facing stock markets, valuations are once again realistic.
China is likely to offer investors a difficult ride over the next few years. The path to structural reform will not run smoothly and economic growth momentum will ebb and flow. Investors should be more nervous if Chinese policymakers stray off their current course.
