China: Enter the Year of the Dragon

As China closes down to celebrate the start of the Year of the Dragon, thoughts turn to what the new year could bring. The Chinese consider the dragon to be the luckiest sign of their zodiac but, appropriately perhaps for 2012, it is also seen as unpredictable.

China has had a difficult year. China’s Q4 GDP of 8.9% beat estimates of 8.7%, the slowest expansion in ten quarters. China’s property market is suffering, while the European debt crisis is dampening Chinese exports. The major economic activity indicators for December were broadly encouraging: growth in urban fixed asset investment slowed to 23.8% year-on-year in December from 24.5% in November, but industrial production grew at 12.8% year-on-year, up from 12.4% in November. Retail sales rose to 18.1% year-on-year from 17.3% the prior month.

Stefan Angele, head of investment management, Swiss & Global Asset Management, says: “There are signs that the domestic, non-construction economy is picking up the slack from slowing fixed asset investment. This is crucial to keep the economy on a soft-landing path with growth of 8% or more.”

Asian investors with a low weighting to China stocks tended to do best, says Oriel Securities. Aberdeen Asian Income was the top performing Asia Pacific investment company over the year to 31 December 2011, down just 1%, followed by Aberdeen Asian Smaller Companies, down 8.5% and Schroder Oriental Income, down 9%.  Each of these has a relatively low exposure to China.

But is China undervalued? The poor performance of the US and European economies has undoubtedly affected the Chinese economy over the past two years, says Andrew Gillan, manager of the Edinburgh Dragon Trust. “Until real progress is made by politicians in the West, Asian markets including China could well remain weak. In China’s case poor performance these past two years has followed tighter domestic money, the market being driven more by liquidity than fundamentals.

“Whether this weakness persists depends now on the authorities ability to engineer a soft landing. Slower land sales and souring loan books are evidence that the property boom is over. Battered export markets make the slowdown worse. While Beijing has room to stimulate if need be, the climate for earnings has worsened and mainland valuations are not compelling, unlike those in Hong Kong where we find value.”

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