The Chinese Gravy Train

[N.O.R.F]

Economists among the nomads take note, for future essays etc!

 

You can buy into the China story Investors see huge potential in the biggest emerging global player

By William Kay

25 October 2003

 

 

Tim Barclay, a 40-year-old planning manager from Bedford, is an investor who takes his cues from what he sees, rather than what people tell him. So when he noticed that his employer, BOC Gases, was investing in China he decided it would make sense to follow suit. "BOC recognises the long-term growth potential as the Chinese markets open up, so I bought into the Invesco Hong Kong and China fund," he said.

 

Many UK investors have recently converted to what City professionals refer to as "the China story". China has long been derided as a rudimentary economy with an interfering government and ill-managed companies whose accounts bear little examination. That is changing, as is demonstrated by the international clamour for China to upvalue its currency, the renminbi, to curb its exports and suck in more imports.

 

But some investment experts say the Chinese economy is overheating and its companies' share prices may soon be hit by higher interest rates and other restrictions. China has been making an increasing impact on the world as the transition from a planned to a market-led economy has taken shape. The people at the sharp end, running companies always looking for global opportunities, have enthusiastically tuned in to the China story.

 

In August, Mr Barclay's boss, the BOC chief executive Tony Isaac said: "We continue to see growth in the Asian markets where we are particularly well placed to take advantage of the opportunities as they arise."

 

Sir Robert Wilson, chairman of Rio Tinto, among the world's largest mining companies, said: "China's growth, with its heavy emphasis on infrastructure development, has become a major influence in the market for many of our products. China now accounts for 17 per cent of global copper consumption, 16 per cent of aluminium production and nearly 23 per cent of global steel consumption. China's consumption of metal has been growing by more than 10 per cent annually and rapid growth seems likely to continue."

 

China already consumes more copper and steel than the US. As the Chinese economy continues to grow, it is putting pressure on the mining and metals markets to keep up with demand. This is pushing up the prices of raw commodities. And China is starting to hurt other countries, particularly the US. On some estimates, it has caused the loss of 2.8 million US manufacturing jobs since 2000.

 

John Crawford, the Henderson investment group's main Asia watcher, has seen the pace of expansion. He said: "I was there in April, and I was staggered by the changes, especially the emergence of an affluent middle class. In the coastal cities, which have gained most from the economic growth, 5 to 10 per cent of the population has enough money to buy a house and car, and go on foreign holidays. That amounts to 40 to 80 million people who have aspirations and want to spend, and that can only be good."

 

This has not escaped the attention of Sir John Bond, chairman of HSBC, a global bank with roots in Asia. He told his shareholders: "In developing countries like China, we believe we will see a growing demand for all kinds of financial services as it grows its per capita income and new consumer markets emerge."

 

As Mr Crawford pointed out, this means the Chinese economy is being driven by two engines. Until now, exports have led the way, thanks to the country's rock-bottom wages making its goods cheaper than nearly anywhere else. But to that is being added consumer spending. It adds up to an exciting prospect, especially as the UK's low-inflation environment looks as if it might keep the London stock market subdued for the next few years.

 

But the key question for investors is how best to tap into the China story. Fund managers agree there are three basic ways to invest in China: buy its companies' shares direct, buy a fund which invests at least partly in the country, or buy shares in western companies which stand to gain from trading with China.

 

Local companies can be listed on the Shanghai or Hong Kong stock exchanges, but Mr Crawford advises against tangling with those in Shanghai. "It's like a casino," he said. "The standards of accountancy and transparency are not as high as in the West." But the most-established companies are listed in Hong Kong, where they have to conform to international standards and are more likely to have proven management.

 

The Hong Kong-listed Chinese companies tend to be in telecoms, property, ports and oil. Not as exciting as making motorcycles and in-car entertainment systems, perhaps, but probably more reliable.

 

From Shanghai, Nancy Wang, Jupiter Asset Management's China specialist, said: "Historically, the biggest excitement on Hong Kong-listed shares is speculation about allowing domestic Chinese to buy. Many companies have been quietly restructuring for better earnings and balance sheets, which with the strong growth in the Chinese economy means earnings have ballooned as have dividends. And there is speculation about renminbi revaluation."

 

Mark Breeden, who runs Investec's Hong Kong and China fund, said: "It's not going to be a smooth ride. Economic growth is running at 9 per cent a year, several times the UK rate, money supply is growing 25 per cent, a third of all bank loans will not be repaid and property prices in cities such as Shanghai are soaring. It's not sustainable, so we are bound to see higher interest rates. The potential is there, but there will be a crunch, and that will mean volatile share prices."

 

Some experts counsel caution. John Hatherley, head of Global Analysis at M&G, said: "Buying China shares is a game for specialists, and private individuals are best off investing through a fund. But even a China fund is a dangerous game, so better to go into a well-managed Asia Pacific fund invested in Korea, Hong Kong and Taiwan. Or you can invest in blue-chip companies benefiting from the China phenomenon, such as HSBC or Standard Chartered Bank."

 

China shares have risen sharply this year, but the bulls are convinced this is only the start and there is more to come.