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China – The Year of the Goat

China’s influence on the world’s economy is immense. It is presently the second-largest economy in the world and in monetary terms its growth rate has exceeded that of the US since 2006 (tables 2 and 3). The long-term China story remains positive, led by the secular trends of urbanization, industrialisation and positive demographic change.

Chinese consumers have been rapidly acquiring a taste towards online purchases and, contrary to the slowing growth trend elsewhere, internet retailing and associated technologies, seem to be booming. E-commerce platform Alibaba has expanded rapidly, social networking company Tencent has over 440 million active users (and growing), and search engine Baidu, which is the fifth most visited website in the world, are just a few bright examples within this expanding industry. Furthermore, growth potential is huge – China currently has over 600 million internet users, compared to 277 million in the US and 546 million in Europe.

China also seems to have avoided a hard landing that many expected. Simultaneously, the country’s economy remains at a crossroads as it attempts to stem its addiction to credit-fuelled growth. Slowing economic growth has forced the government to lower its targets, with Chinese president Xi Jinping describing slower growth as the “new normal”. While growth of the Chinese economy averaged c.10% over the three decades to 2010, in the past few years it has come down to below 7% and the IMF lowered its 2015 forecast to 6.8% in January, pulling down global growth forecast to 3.5% from the 3.8% previously expected. Nevertheless, Chinese growth still exceeds that of all developed economies.

Despite re-focusing the economy towards domestic growth, China remains one of the greatest world exporters. The table below illustrates that even the falling share of exports relative to the country’s GDP in 2013 still translates into 2.4 trillion US dollars, which is almost the size of the UK’s economy:

 

Table 1: China: Exports of goods and services

 

 

 

Year

2011

2012

2013

% of GDP

28.5

27.3

26.4

Value in U.S. dollar (billions)

2,087

2,247

2,424

* Sources: IMF, Worldbank

To withstand the slowdown, the government continues to take steps to manage its economic cooling, using targeted ‘mini-stimulus’ measures, adapting to its economic ‘new normal’. These measures have had some short-term impact but with overall domestic demand remaining weak, signs of a fundamental turnaround have yet to be seen. In the meantime, consensus expectations are for further downgrades of the Chinese economic growth forecast.

Big risks also remain. The Chinese government (and not the free market mechanism), controls the foreign exchange rate. Potential further actions allowing the renminbi to weaken, promoting exports and fuelling economic growth, could have side effects. The possible outcome could see spillover to other emerging market currencies, and potentially to developed ones like the Japanese yen, thereby creating more volatility and possibly depressing future investment returns. Furthermore, the staggering growth of the A-share market, the stock market only accessible by Chinese nationals until very recently, could be a bubble ready to burst. It is also worth noting that foreign investors continue to drive market movements for most funds non-Chinese investors have access to, also adding to volatility.

With this in mind, investors need to navigate Chinese equity markets carefully. Return expectations for many funds heavily exposed to China, relative to those enjoyed during the start of the century, have been diminishing to reflect slowing local and global economies. However, we believe that longer-term investors are likely to be rewarded for their patience and risk-taking with this world superpower. Funds we currently like include Schroder Asian Alpha Plus, First State Asia Pacific Leaders and Aberdeen Asia Pacific Equity which invest both in China, but can also take advantage of opportunities from elsewhere in Asia.

In monetary terms, the Chinese economy’s growth rate has exceeded that of the US since 2006:

Table 2: China

 

 

 

 

 

 

 

 

Economic Indicator

Units

Scale

1996

2006

2011

2012

2013*

2014*

Gross domestic product, constant prices

Percent change

%

10

12.7

9.3

7.7

7.7

7.5

Gross domestic product, current prices

US dollars

Billions

856

2,713

7,322

8,229

9,181

10,028

Gross domestic product: approximate annual change in US dollars

US dollars

Billions

86

344

681

630

704

756

* estimates

Source: IMF

 

Table 3: The United States

 

 

 

 

 

 

 

 

Economic Indicator

Units

Scale

1996

2006

2011

2012

2013

2014*

Gross domestic product, constant prices

Percent change

%

3,796

2,667

1,847

2,779

1,878

2,768

Gross domestic product, current prices

US dollars

Billions

8,100

13,858

15,534

16,245

16,800

17,528

Gross domestic product: approximate annual change in US dollars

US dollars

Billions

307

370

287

451

315

485

* estimates

Source: IMF

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.

 

Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.

 

Underlying investments in emerging markets are generally less well regulated than the UK. There is an increased chance of political and economic instability with less reliable custody, dealing and settlement arrangements. The market(s) can be less liquid. If a fund investing in markets is affected by currency exchange rates, the investment could both increase or decrease. These investments therefore carry more risk.