Cracks in the China

The debt problems in the developed world are a good reason for investors to look further afield for returns but concerns about China are looming over slowing growth, inflation and the spectre of a property bubble.

China’s economy relies on exports, so many believe it will suffer from the slowdown in the West.

China’s year-on-year GDP growth rate in the second quarter was 9.5 per cent, slightly down from 9.7 per cent in the first three months of the year.

Newton investment manager James Harries, who runs the £2bn global higher-income fund, is bearish on China.

Speaking to Money Marketing at the Cofunds economic forum last week, he said: “There is an expectation that China is going to continue to grow strongly because it spent a lot on its economy and grew during the credit crunch, which some say implies it will continue to grow at a rate of more than 9 per cent.

“I expect there will be slow growth in China. The property market looks overheated and Chinese banks have lent aggressively, having been told to do so to combat the effects of the global financial crisis.

“This is likely to have led to a big misallocation of capital in the form of unproductive fixed-asset investment, which will lead to poor returns on capital employed or, ultimately, a problem in the banking system.”

Martin Currie investment director for China James Chong disagrees. He says: “The impact from the developed world to be offset by domestic growth.

“The government does not want extremely high economic growth and is focused on quality rather than quantity. I expect slower GDP growth of 8 to 9 per cent this year.”

According to Chong, the Chinese government tried to control the property market by announcing in January this year that it would raise the deposit requirement for buying a second home from 50 to 60 per cent. The effect of the measure can be seen in the fall in transaction volumes and prices in some cities.

Chong says: “The government is cooling the property market nation-wide. The focus has been on first and second-tier property but it is starting to go into third and fourth-tier property now.”

Aviva real estate product strategy director Chris Laxton says there is no exposure to China in the £317.9m Asia Pacific property fund but he is looking at commercial investment opportunities in China for segregated portfolios for institutional clients.

Laxton says: “The residential property market in China is in a bubble and will continue to be so, making it very high risk. So much money is invested into it on speculation.”

He claims Aviva has no plans to invest its retail funds in Chinese property over the next five years. He says: “Before we invest in China I would like to see political certainty, robust valuations and confidence in those valuations.”

Bestinvest senior analyst Ben Seager-Scott says: “Investors should be looking more at China as its fundamentals and emerging markets look attractive. However, investors are in risk-off mode and sentiment is weak and that is not great for these markets.

“One of the main long-term growth themes in China is the rise of domestic consumption. I think that will be a multi-year theme built around emerging affluence.”

Seager-Scott says the rise in domestic consumption means China is largely shielded from the economic slowdown but if the crisis in Europe gets worse, there will be a global market sell-off.

He says: “Chinese inflation peaked at 6.5 per cent in July and has come down to 6.2 per cent, according to August figures. I hope it will be closer to 5 per cent by the end of the year.”