By KIERAN PHYO 28/01/2010
China is closing in on Japan as the world second largest economy and has now surpassed Germany to become the world’s biggest exporter, shipping goods worth US$1.2 trillion in 2009.
China’s dependence on exports became a concern during the financial crisis, when its major trade partners in the US and EU reduced their orders. As a result, China suffered deflation early last year and responded by offering cheap credit, pumping $586 billion into the economy, which contributed to GDP growth in the last three quarters of 2009. As we start 2010, The People’s Bank of China, China’s national bank, tightened the fiscal stimulus by increasing the reserve, that banks are required to hold, by 0.5%. This action was not expected for several months and highlights the government’s concern that loan growth is fuelling a property bubble.
Outlook
China announced earlier this month that it is further opening the doors for foreign investors to enter partnerships, in which they can own domestic companies. The property market continues to have a strong outlook, with a need for office space in Shanghai and Beijing and an overwhelming demand from growth in urban population centers. The recent action will have a small negative impact on Chinese bank and property stocks in the near term but should provide support for long term growth. At some point, Chinese interest rates are likely to rise further to prevent the economy overheating should export recovery impact the domestic market.
Our view
Chinese stocks lagged the rest of Asia at the end of 2009, having rallied strongly over the course of the year. Our long term outlook remains positive, however, on current valuations China is not cheap. With commentators predicting a correction in Chinese stock markets, we recommend investors should look to defensive managers who are well positioned in the current climate.
Recommendations
First State Greater China Growth – Managed by Martin Lau. As a pure China fund, this fund should be considered more risky than broader Asian Funds. However, the manager's approach results in lower levels of volatility and tends to outperform if markets do fall.
First State Asia Pacific Leaders – Angus Tulloch manages this broader Asian fund and takes a similar approach to Martin Lau. As it is more diversified this fund is a suitable core holding for investors looking to get exposure to Asia and China.
If there is anything you wish to discuss regarding this article please call one of our Advisers on 020 7189 9999.