Market  iews      V                       ™Country brief: China                                         By Peter Temple   ...
™   Market  iews      V                                                                                                   ...
™   COUNTRY BRIEF: CHINA                                                                                                  ...
™    Market  iews       V                                                                                                 ...
™   COUNTRY BRIEF: CHINA                                                                                                  ...
™   Market  iews      V                                                                                                   ...
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  1. 1. Market  iews V ™Country brief: China By Peter Temple What are the risks of investing in China? Peter Temple explores the factors that may affect the Chinese economy and looks at where potential risks lie. Stock markets and companies How have China’s stock market indices performed recently and what differences are there between the Chinese and Western markets?Market  iews™ from dianomi™ V Comprehensive Investment Guides and Reports PAGE
  2. 2. ™ Market  iews V COUNTRY BRIEF: CHINAWelcome Contributors PETER TEMPLE is a freelance financial journalist and currentlyMarketViews™ provides free, unbiasedinformation for consumers who want to contributes regularly to the Financial Times, and is the regular featuresmake better-informed financial decisions. writer for the Investors Chronicle. He has also been a regular andWritten by prominent financial journalists, extensive contributor to Interactive Investor for over ten years.our range of free guides and reports provideoriginal, high quality financial contentfocused on actionable investing ideas.Each publication is commissioned in Contentsresponse to your requests, so please dolet us know what other financial topic orsector you’d like us to cover by emailingus at editor@marketviews.com or byvisiting our website www.marketviews.comand voting.You choose. Our team of experts will do 03 Economic background The story so far.the rest. 03 Key growth points Key areas of growth in China’s economy. 04 What are the risks? Find out more about risk control. 04 Stock market and companies The differences between Chinese and Western stock markets and companies. 05 Investment vehicles How to get increased exposure to the Chinese equity market. 06 The MarketView By Peter Temple. Disclaimer No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this publication can be accepted by the publisher, author or sponsor. The author may have a position in any or all of the specific investments or investment categories mentioned in this publication. Some of the companies or investments mentioned may be clients of dianomi. MarketViews is published by dianomi ltd, One America Square, Crosswall, London EC3N 2SG. MarketViews and dianomi are trademarks of dianomi ltd.PAGE
  3. 3. ™ COUNTRY BRIEF: CHINA Market  iews VEconomic background China’s level of domestic consumer spending as a in many countries, is increasingly focused, percentage of GDP, although possibly understated according to reports, on safety and quality. TheIt is no secret that China’s economy has boomed in by official statistics, remains well below the days of Chinese consumers being palmed offthe last two decades. Estimates suggest that there level not only of Western economies but also of with cheap imitations of Western brands arehas been real growth of around 10% a year over the many emerging markets. The likely trend in the drawing to a close.30 years to end-2010. Over that period dollar GDP economy in the next two decades is for slowerper head has increased from $222 to $4590. GDP growth than historically. But this slowdown will be mitigated by consumption growth. Key growth pointsAfter gains such as these, it is equallyunsurprising that growth will be at a slower China’s population trends are crucial to any China has the components of natural underlyingrate from now on. Estimates suggest a norm assessment of where the best investment growth and the savings to support it.for nominal GDP growth of around 8-9% a opportunities lie. China has an ageing populationyear. Whether or not growth comes in above or compared to many other emerging markets, As previously noted, China has the abilitybelow this norm depends to a degree on external pensioners will outnumber children by 2025, not to make the transition to an economy whereeconomic conditions. that different to the US. This in turn is likely to consumption and service industries assume a drive demand for pension products and health greater degree of importance, and where the Estimates suggest that care in future years. current high level of private saving is at least partly channelled into financial products such asthere has been real growth While there has been much focus in the past year pension products and health care. of around 10% a year on the potential for a collapse in property prices, this does not seem to have materialised. Some Social housing and infrastructure spending, andTwo factors shelter China from adverse economic analysts believe that increased spending social continuing demand for the materials associatedtrends in its export markets. First the degree to housing, sorely needed in China, will be used with it, may be a continuing hallmark of the nextwhich China remains a controlled economy, actively to take the heat out of the property market phase of China’s development.where banks can be and are directed to increase without precipitating a wholesale collapse.or slow down lending and where social policy is The retail sector in China is currently smallmanipulated to underpin growth. The second is the Consumer spending, although as previously and fragmented, suggesting an opportunityscope for domestic consumption to increase. indicated a lower percentage of GDP than for consolidation and a focus on efficient PAGE
  4. 4. ™ Market  iews V COUNTRY BRIEF: CHINA Data box: China (all figures in %) Stock market GDP Growth: latest quarter 8.1 and companies China’s stock market indices (see data box) GDP Growth: Current Year 8.3 performed badly in 2011. According to data published in The Economist, the SSEA index Inflation: Latest Month 3.6 dropped by 14.4% in local currency terms and by 10.4% in dollar terms since the end of Inflation: Current Year 3.7 2010. The SSEB index is down by 25.3% and 21.8% respectively over the same period. Current Account Balance (% of GDP) 2.1 5-year Govt. Bond Yield ‘A’ shares can be traded in local currency by 3.18 Chinese citizens and institutions; ‘B’ shares can be traded in foreign currency by both Stock market indices change since 31.12.11 domestic retail investors and overseas-based individuals and institutions. Hence the SSEB FTSE Greater China Index 11.9 index is a fairer reflection of the conditions foreign investors’ experience. Some foreign SSE ‘A’ Shares Index ($ terms) 4.7 institutional investors are allowed, provided they are licensed to do so, to trade ‘A’ shares. SSE ‘B’ Shares Index 11.1 ($ terms) There is speculation that at some stage the two classes of share may be merged.-20 -15 -10 -5 0 5 10 15 Chinese shares (‘H’ shares and so-called distribution as consumer spending increases. world may become more muted as domestic ‘red chips) are also traded in Hong Kong. There are opportunities for retailers of high consumption levels, and associated imports of ‘H’ shares are Chinese mainland registered quality consumer goods. consumer goods, increase. companies which have been permitted to issue a separate class of shares to be Possible risks? A pronounced recession traded in Hong Kong. ‘Red chips’ are non- mainland China registered companies with in the West could trim a significant shareholding and/or some A pronounced recession in the West could trim management control exercised by mainland GDP growth by a couple of percentage points GDP growth by a couple Chinese investors. although, given signs of incipient growth in the of percentage points US economy, this is looking less likely. One difference between the Chinese and Western stock markets is that Chinese More serious would be a wholesale collapse companies almost always have effective in property prices, although there are strong control vested in a state shareholding or grounds for expecting this can be avoided. Once sizeable ownership by founding directors it is clear that residential property prices are on or entrepreneurs. Combined with the a stable footing, China may introduce a property accounting foibles to which Chinese tax as a revenue raising measure and to try and companies can be prone, this means that pre-empt the development of a further bubble. due diligence by investors, in particular the ability to cross-check management claims State control of the economy, with the via independent sources, is crucial. inefficiencies and unpredictability this can engender, is not so much an economic risk as Companies differ considerably in quality, one for investors to ponder. The same goes for as they do in valuation measures. There is the unregulated and freewheeling approach of therefore scope for mispricing of equities to the Chinese corporate sector to Western-style a much greater degree in both a positive and accounting conventions. But concern over negative sense. This makes the acumen of an China’s financial imbalances with the rest of the individual fund manager a key variable. PAGE
  5. 5. ™ COUNTRY BRIEF: CHINA Market  iews V Good to know… • Londonstockexchange.com has a comprehensive list of ETFs under the “ETF” tab at the “price and markets” section • Trustnet.com lists list 14 unit trust and OEICs under the China/Greater China heading, and several investment trusts. • Many China orientated investment trusts fall well short of pure exposure. Check portfolio details before investing. Risks and opportunities Risks • Recession in Europe • Property price collapse Investment vehicles Trusts with over 40% weighting to the Chinese • Government actions market (directly or via Hong Kong listed stocks) • Opaque accounting There is an increasing range of ways of getting are Henderson TR Pacific (44% weighting), • Currency impact exposure to the Chinese equity market. Trustnet JP Morgan Chinese (75%) and Fidelity China (www.trustnet.com) lists 14 unit trusts and Special Situations (93%). JP Morgan China Opportunities OEICs under the China/Greater China heading. dropped 33% in 2011 (according to AIC data). • Growth 8-9% a year Greater China normally signifies funds that also Fidelity China Special Situations fell by 40% • Low consumer spend invest in Hong Kong stocks, Chinese stocks and Henderson TR Pacific by 26% over the • High savings rate listed overseas, and Taiwan. Many of these same time scale, all in total return terms. • Retail consolidation vehicles have comparitively short track records • Infrastructure spend and high risk scores. Greater China normally The best performer over one, three and five years, signifies funds that also according to Trustnet’s data, is First State Greater China Growth A which has risen respectively 5%, invest in Hong Kong 91% and 86% over those periods and which has stocks, Chinese stocks a risk score (weighted volatility relative to the market) of 88 (FTSE100 = 100). listed overseas, and Taiwan The highest yielding fund in the group is Neptune Greater China Income, which has a yield of 4.96% and a risk score of 76, but which has been in existence less than three years. While there are several investment trusts investing in China, few offer pure exposure. PAGE
  6. 6. ™ Market  iews V COUNTRY BRIEF: CHINAOver ten years to end-2011 Henderson TR The MarketViewPacific is the better performer, rising 162% overthe period versus 130% for the JP Morgan fund.The fund also comes out top over three years andfive years. The Fidelity fund was only launchedin April 2010 so does not figure in long termperformance data. Henderson Far East also has With fading fears of a deep recession in the in Chinese equities in past year or so, therea combined weighting in China Hong Kong and Eurozone and growth re-emerging in the are opportunities to benefit from mis-Taiwan in excess of 40%, a yield of 5.1%, a sub- US, China should see GDP growth of 8-9% pricing of equities and long term growthmarket risk score and respectable performance in 2012. opportunities are available at what are, byover one, three and five years. Western standard, ‘attractive ratings.’ Low per capita consumer spendingThere is a select group of exchange traded (lower than many emerging markets) andfunds listed in London that track either the high savings suggest that China has theFTSE China 25, MSCI Emerging Asia, or BRIC components for natural underlying growthrelated indices, all of which have either a total in the medium and long term too.or significant weighting to China. The iShareFTSE China 25 (EPIC FXC) tracks an index Infrastructure spending, providers ofof 25 leading ‘red chip’ and H shares traded savings products and consolidation inin Hong Kong. The iShare tracking the MSCI the retail sector look to be worthwhileIndex (EPIC 2802) has a combined weighting investment themes.to Mainland China and Taiwan of 42%TheiShare FTSE BRIC 50 ETF (EPIC BRIC) While there are vehicles available forhas a weighting of around 40% in Chinese passive investment in China, activecompanies. A comprehensive list of ETFs investors need expert managers to helptraded in London can be found under the navigate Chinese companies’ idiosyncratic‘ETF’ tab at the ‘prices and markets’ section accounting and the shoals of a state-of the London Stock Exchange website controlled economy. But after sharp falls(www.londonstockexchange.com).Market  iews V ™Thank you for reading this independently written guide fromMarketViews™.We hope you have found it informative and educational. If youhave a financial topic or sector that you would like us to cover,please do not hesitate to email us: editor@marketviews.comFor details on the latest guides visit the MarketViews™ website:www.marketviews.comYou can also follow our latest saving and investing analysis ontwitter: http://twitter.com/_marketviewsPAGE

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