1. Market iews
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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
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2. ™
Market iews
V COUNTRY BRIEF: CHINA
Welcome Contributors
PETER TEMPLE is a freelance financial journalist and currently
MarketViews™ provides free, unbiased
information for consumers who want to contributes regularly to the Financial Times, and is the regular features
make better-informed financial decisions. writer for the Investors Chronicle. He has also been a regular and
Written by prominent financial journalists, extensive contributor to Interactive Investor for over ten years.
our range of free guides and reports provide
original, high quality financial content
focused on actionable investing ideas.
Each publication is commissioned in
Contents
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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.
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3. ™
COUNTRY BRIEF: CHINA Market iews
V
Economic 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. The
It is no secret that China’s economy has boomed in by official statistics, remains well below the days of Chinese consumers being palmed off
the last two decades. Estimates suggest that there level not only of Western economies but also of with cheap imitations of Western brands are
has 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 slower
per head has increased from $222 to $4590. GDP growth than historically. But this slowdown
will be mitigated by consumption growth. Key growth points
After gains such as these, it is equally
unsurprising that growth will be at a slower China’s population trends are crucial to any China has the components of natural underlying
rate 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 population
year. Whether or not growth comes in above or compared to many other emerging markets, As previously noted, China has the ability
below this norm depends to a degree on external pensioners will outnumber children by 2025, not to make the transition to an economy where
economic 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 as
there 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, and
Two factors shelter China from adverse economic analysts believe that increased spending social continuing demand for the materials associated
trends 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 next
which 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 small
manipulated to underpin growth. The second is the Consumer spending, although as previously and fragmented, suggesting an opportunity
scope for domestic consumption to increase. indicated a lower percentage of GDP than for consolidation and a focus on efficient
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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.
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COUNTRY BRIEF: CHINA Market iews
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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.
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Market iews
V COUNTRY BRIEF: CHINA
Over ten years to end-2011 Henderson TR
The MarketView
Pacific is the better performer, rising 162% over
the period versus 130% for the JP Morgan fund.
The fund also comes out top over three years and
five years. The Fidelity fund was only launched
in April 2010 so does not figure in long term
performance data. Henderson Far East also has With fading fears of a deep recession in the in Chinese equities in past year or so, there
a 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 growth
market risk score and respectable performance in 2012. opportunities are available at what are, by
over one, three and five years. Western standard, ‘attractive ratings.’
Low per capita consumer spending
There is a select group of exchange traded (lower than many emerging markets) and
funds listed in London that track either the high savings suggest that China has the
FTSE China 25, MSCI Emerging Asia, or BRIC components for natural underlying growth
related indices, all of which have either a total in the medium and long term too.
or significant weighting to China. The iShare
FTSE China 25 (EPIC FXC) tracks an index Infrastructure spending, providers of
of 25 leading ‘red chip’ and H shares traded savings products and consolidation in
in Hong Kong. The iShare tracking the MSCI the retail sector look to be worthwhile
Index (EPIC 2802) has a combined weighting investment themes.
to Mainland China and Taiwan of 42%The
iShare FTSE BRIC 50 ETF (EPIC BRIC) While there are vehicles available for
has a weighting of around 40% in Chinese passive investment in China, active
companies. A comprehensive list of ETFs investors need expert managers to help
traded 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 ™
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