It is obvious that China still wields enormous economic power when compared to even the largest of global powers, and especially when it spends its cash so ostentatiously as it has done during its Premier’s European tour.
There are some who see this as Wen Jiabao simply propping up Europe as a trading partner given around 25% of its exports end up in the eurozone; others see him as simply scoring political points and drawing attention away from its poor record on human rights; or as part of a world tour to celebrate the 90th anniversary of the founding of the communist party.
China slowing
However, economically China is not in the rudest of health itself as its National Audit Office figures show total local government debt was 10.72trn yuan (£1trn) at the end of last year. This compares to figures from the People’s Republic of China in June that had local government debt at 14.4trn yuan.
On this, Stefan Angele, head of investment management at Swiss & Global Asset Management, says: “The NAO report is obviously politicised and aims to downplay China’s local government debt problem, but it reveals some of the country’s risky financial practices and calls into question Beijing’s ability (or willingness) to manage its debt.”
The growth story is still there, as its GDP figures continue to show strong growth despite inflation being at a three-year high of 5.5%.
So how does China look from a UK investor’s point of view?
Rupert Watson, head of asset allocation at Skandia Investment Group is a big supporter, says: “Falling inflation and strong economic growth could cause Chinese equities to outperform other markets in the second half of the year, perhaps substantially.
Macro/market
“Recent comments suggest that China is near the end of its monetary tightening campaign. This should boost Chinese equities which have underperformed over the last year on fears that tighter monetary policy will cause a sharp economic slowdown.”
“Although there may be one or two more elevated inflation readings we expect Chinese inflation to fall in the second half of the year. While Chinese manufacturing may weaken further in the short run, we expect China to avoid a hard landing and pick up later in the year.”
A more parochial, but equally as positive, view comes from Fen Sung, investment manager of the Premier China Enterprise Fund, when he says: “China has been the world’s factory for over a decade, manufacturing all the goods we love and cannot live without; and I do not believe this will change for another decade. China has already realised that the only way to achieve this is by moving up the value chain.”
There may have been a slowdown in economic growth and a rise in inflation but there is equally plenty of evidence to support the emergence of its own consumer who is willing to spend.
Strategically, China is still a strong partner for the UK and Europe; tactically it offers great opportunities for investors – even as the nature of these opportunities start to change.
