On the other hand, I do not expect any bold policy actions from China in reaction to further problems from Europe if they develop.
As a result, I will continue to avoid many exporters based in China that require better overseas growth or domestic stimulus.
Social trends
The change in China from my youth as well as when I began my investment career in 1994 continues to amaze me. Anecdotally, traffic in Beijing has become markedly worse from my last visit but the air quality in Beijing seemed somewhat improved and not quite as dreadful as one reads about in the Wall Street Journal.
The complaints of ordinary citizens, however, have changed little from recent years; top of the list being corruption, traffic, and high cost of housing. I do sense that inflation has become a bit more of a concern for the Chinese people than it had been in the recent past. The sky-high cost of housing, especially in major urban centres has also moved up the list of major worries for many people with no evidence of softening materially.
Economic outlook
The stability of the country and the durability of China’s long-term economic growth are very much dependent on the sustained improvement of the living standard of ordinary Chinese citizens. The most important and exceedingly tricky job for the Chinese ruling elite today is managing the many negative side effects of the break-neck speed of economic development in China while also keeping peoples’ living standards rising.
Fortunately, so far, China has performed this high-wire balancing act rather admirably and indications suggest that China will have a fairly soft landing despite global economic sluggishness.
Political change
Politically, 2012 will be a very important year for China, due to the once-in-a-decade leadership change at the 18th National Congress of the Chinese Communist Party.
Current President Hu Jintao, Premier Wen Jiabao, and Chairman of the National People’s Congress Wu Bangguo are all scheduled to retire and the all-powerful Politburo and its Standing Committee will be repopulated with the next generation of leaders.
This has serious implications not just for China-watchers but also for global equity investors.
It is a delicate time for the top leaders in China, both for those who are retiring and for those who will be promoted – none of them want to initiate any new reforms or major policy changes before the completion of the transfer of power in late 2012.
The retiring leaders want to leave a legacy of peace and prosperity but will not be allowed to initiate any changes that could make the jobs of the new leaders difficult. Similarly, the new leaders will do all they can to avoid being seen as impatient or otherwise jeopardise their chances of getting the top posts for which they have worked all their lives.
Although Chinese policy makers are worried about the crisis unfolding in Europe and the slow pace of recovery in the US, I do not expect the Chinese policy makers to do anything dramatic, barring a major world-wide crisis of one sort or another, (a regional war here or there, a small country decides not to pay its debt anymore, etc., do not qualify).
And finally…
In conclusion, as we start 2012, we are cautiously optimistic about global equity markets. We think that the soft-landing scenario for China will be a positive factor; many of the risks facing equities have already been well discounted in the share prices of most leading blue chips worldwide.
We see more attractive investment opportunities as the markets go through their current corrections based upon inexpensive valuations leading to asymmetrical return outcomes.
