FOCUS ON CHINA

The Chinese Stock Market is booming, of that there is no doubt. And at the bottom of this page we highlight our recommended funds, with links to our fund analysis, details of discounted charges through us, and the ability to buy online.

But there is much to consider before you decide whether and how to include China in your portfolio.

The Chinese Stock Markets certainly looked expensive during 2007 compared to other emerging markets yet were not massively expensive compared to historical precedents, and market falls in 2008 have created more obvious value. The key for investors with a long time frame (5-10 years at least) is the very compelling economic outlook - this is far from just an investment story for this Olympic year.

One-fifth of all humanity, that is the Chinese population of 1.3 billion. The size of the Chinese economy is US$2.6 trillion, which represents 13% of global economic production (GDP) *. It is growing fast, and expected to exceed that of the EU in 2015. Goldman Sachs reckon that by 2040 China will be the worlds biggest economy if current growth rates and reform trends continue.

Yet this doesn't adequately illustrate the potential. Also consider that:

300 million of the population live on less than a dollar-a-day, according to the World Bank.
there are only two cars for every 100 people in China, contrasting sharply with 50 per 100 in the US

China has moved forward rapidly, but clearly there is much more to do, which will be very positive for the economy. It should also be positive for the world economy, but will also create pressures.

For example, as a result of China slowly but surely introducing capitalist ways since 1978, their economy, which was fundamentally rural, now has 700m of the 1.3bn population living in cities. It is reckoned that another 300m will move to urban areas over the next 15 years, requiring huge expenditure on homes, roads, schools, offices, etc. This means they will need to build the equivalent of two New York cities every year for the next 15 years, putting huge pressure on world resources: steel, aluminium, copper, nickel, iron ore, oil, gas, coal and many other basic metals and resources, not to ignore rising living standards increasing demand for foodstuff.

One obvious opportunity derived from these pressures is to invest into commodity funds and similar, as set out elsewhere.

Until recently, much of China's progress has been heavy reliant on exports of cheap manufacturing goods. The current five year plan, among other things, aims to focus the economy towards domestic consumption, with less reliance on cheap exports of cheap manufacturing goods, and less wasteful capital investment. With a few hundred million new consumers, the opportunities are vast. The authorities are also focussed on keeping a lid on inflation, and in particular food shortages.

Legendary US fund manager Jim Rogers said that the Chinese adoption of capitalism has "unleashed the same spirit of enterprise that put China in the forefront of world commerce, industry and technology following the turn of the first millennium.”

Political support is vital if this entrepreneurial spirit is to reach its full potential in the decades ahead. The sense of observers close to developments, such as Dr Mark Mobius, is that there is unstoppable momentum in China, with strong commitment from the politicians. These politicians have a trial and error approach, which the late Chinese leader, Deng Xiaoping, encapsulated as long ago as 1992:

“we must try these things out. If they prove sensible, we can expand them. Otherwise we can put a stop to them.”

The potential is obviously great, particularly if the economy enjoys a smooth transition to a greater emphasis on domestic consumption. The years of reform, infrastructure development, and capital investment, highlight a strong commitment to continuing progress.

In the meantime, these are China funds that we have analysed and recommend:

Gartmore China Opps	About	Buy
Invesco Perpetual HK & China	About	Buy

* on a purchasing power parity basis

I found the Top Funds Guide interesting – particularly the section on risk. Of more interest to me ...
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