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China syndrome

Chris Salih takes stock of the China debate

China is a hot topic among IFAs as Fidelity fund guru Anthony Bolton prepares to launch a China special situation investment trust.

The MSCI China index was up by 60.6 per cent and 91.3 per cent over one and three years at February 26, according to Lipper.

Bolton believes China is in “a sweet spot”, where income per head of population rise and levels of consumption grow at a rapid pace. He points to the same process having already taken place in Taiwan, Korea and Japan.

He says: “The difference this time is the scale on which the transformation is happening. Never before has there been this kind of development in a country with a population of more than 1.3 billion.”

But advisers have concerns that a short-term correction may affect the Chinese market as monet ary policy tightening squeezes the life out of any rally.

Skerritt Consultants head of investments Andrew Merricks says: “If China has been stockpiling commodities and starts to slow down on purchasing, that may have a knock-on effect for emerging markets.”

Alan Steel Asset Management consultant Alan Adam says: “We are concerned about the China syndrome following recent launches. There could be big hits and misses.”

Whitechurch Securities senior analyst Ben Seager says the firm is neutral on China but the longer argument remains.

He says: “A correction will come at some stage but we do not think it will be too significant. There is incremental tightening in monetary policy, for instance, but looking at long-term growth potential, there is probably more risk from not being in China than being in.”

HSBC China fund manager Richard Wong says although China rallied by 60 per cent in 2009,it still lags in comparison with Brazil, Russia and
India, all of which saw returns of over 100 per cent.

He says: “With trading at around 13.5 times forecast 2010 price-to-earnings multiple and offering a projected earnings’ growth of about 20 per
cent for this year, H shares and red chips, such as China companies listed in Hong Kong, remain attractive.

“This attractive valuation is also supported by the region’s robust economic recovery in 2009. Third quarter GDP grew 8.9 per cent from a year earlier and exports rebounded by a stronger than expected 17.7 per cent in December, after 13 months of decline. This provides a solid
backdrop for ongoing strong performance.”

Jupiter China fund manager Philip Ehrmann says fiscal tightening concerns have been blown out of proportion. He says: “There are no signs of
a bubble. Stockmarkets remain at half the level of the peak in 2007 and have actually gone sideways in the past eight months.

“There are a few signs of property bubbles, as we saw in 2007, but the Chinese have started to raise the base rate and are restricting people’s ability to take out mortgages. China was pre-emptive and stayed ahead of the curve.”

Ehrmann says concerns of inflation rises are more to do with seasonal factors at the end of 2009, such as it being a cold winter and vegetable prices rising.

“It is little to do with too much growth, although the Government was aware 2009 was a strong year, particularly in the context of the global meltdown elsewhere and the fact China needed to ensure it was operating to its potential and not beyond, with a threshold of 9 to10 per cent GDP sounded.”

Baillie Gifford greater China fund manager Mike Gush says: “GDP growth will have to slow eventually as the base gets larger. In about five years, the demo graphic – interms of an ageing population -will start to go against them. It is currently around 2 per cent of the MSCI World index and will rise in time as a result of initial public offerings as state or privately run companies come to market. The outlook for a number of companies remains positive and valuations are supportive.”

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