China story still strong, says East Capital manager

The China investment story continues largely unabated, according to the views of East Capital’s China team, including portfolio manager Gustav Rhenman

Rhenman, along with Kristina Sandklef, macro economist, provided an update following their most recent visits to the country.

Sanklef started by noting the recent concerns over relative slowdown in the Chinese economy. However, the real rate of growth is likely to surpass official targets, as it has done every year snice 2000, according to Macrobond figures. Meanwhile, the fact the Chinese government has steered the economy towards slightly slower growth is the result of deliberate decisions rather than accident, she added.

And the average GDP growth figure – which East Capital is still forecasting will be 8% in 2012 – masks some significant variations, with many provinces targeting far higher growth – Chongqing wants 13.5% and Guizhou 13%, as against Hebei’s 9% or Xinjiang’s 10%.

One of the reasons growth was steered down was fears last year over food price inflation – historically a source of civil unrest. This has abated, widening the policy alternatives available to monetary and fiscal authorities.

Another ongoing trend, Sandklef added, is the falling dependency on export led growth. Dependence on exports has been falling since 2006, East Capital’s figures suggest. This is being matched by moves away from the massive infrastructure stimulus put in place following the global financial crisis in the wake of the credit crunch.

There are still massive requirements for infrastructure development: the average living space per person in urban areas has increased from 3sqm in 1978 to 30sqm today, but there are still hundreds of millions of people expected to move to cities and towns in the coming decade.

That said, the level of fixed asset investments is not sustainable in the long term as the country seeks to rebalance the economy, Sandklef suggested. The government will, though, need to focus on building up the social security safety net to encourage consumption. Without such a safety net, it will be harder to persuade Chinese people to increase consumption and reduce savings ratios, particularly as the country starts to age as a result of the long-standing one child policy.

Sandklef does not put much store by fears expressed around the upcoming leadership transition at the top of the Chinese Communist Party. Interestingly, she did add that the recent purge of populist politician Bo Xilai could tip the balance of power to moderate reformers rather than reactionary elements in the Party.

Possible bright spots for investors in the ongoing macroeconomic changes and linked social policies include the discussion around sustainable development, whereby for example, water is being underpriced as a resource, and environmental pollution continues at dangerous levels.

Speaking from the position of a portfolio manager, Rhenman said that ongoing valuations presented a significant opportunity for growth investors such as himself.

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