Year of the Horse: Is China worth a bet?

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With Chinese New Year celebrations kicking off this week, it may be a good time for investors to think about their allocation to the world's second-largest economy.

China has experienced phenomenal economic growth over the past few decades. But a period of slower growth has left investors anxious.

Just last week, the Hong Kong Hang Seng Index fell to its lowest level in five months as jittery investors withdrew capital amid renewed concerns over a further slowdown, default risks and tightening monetary conditions.

However, official data shows China's economy is starting to stabilise. It grew at an annual rate of 7.7% between October and December and while this was down from 7.8% in the three months to the end of September, it was still higher than the government's 7.5% target.

In addition, since taking office last year, President Xi Jinping has announced a raft of economic reforms which, if implemented successfully, could be enormously transformative and open China to further social and economic reform, and interestingly for investors, new sources of private sector-led growth.

However, experts are cautious over the "ambitious nature" of the reform package and the time it will take to implement the proposals.

Dean Cook, investment research analyst at Duncan Lawrie Private Bank, says: "The extent of China's social reform is going to be a leading factor in identifying what investment opportunities there are in the country. As we enter the Year of the Horse, equine allusions will inevitably be drawn: will the economy fall at the next reform hurdle?

"At the Communist Party Congress in November last year, it became clear just how serious the Chinese administration is about reforming its economy and allowing it to be led by market forces rather than central government edict.

"However, as with most emerging markets, we must approach announcements about economic and social reform with a degree of caution. Given China's size, it cannot overhaul its long-established institutions overnight."

The government also has a number of crucial tailwinds to tackle before investors can feel confident that China is on the path to stable economic growth.

One concern is the further stress the reform package will put on government debt levels, which have built up after the first stimulus package in 2009 following the financial crisis, and when China's economy required increased stimulus in 2012 following flagging growth in Europe and a slower than expected recovery in the US.

China's runaway property prices are also a sore point, with many residents already priced out of the market and forced to pay high rents.

But Cook points out that the Chinese government is aware of the issues that it needs to tackle: "Already, local government finances are coming under greater supervision and the central Government is working hard to improve oversight, including the introduction of a credit rating system for local governments.

"The Chinese Government clearly recognises the challenges ahead, and will focus on growing debt at a slower rate than economic growth, in order to bring debt under control."

 

Further Reading

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Sixteen countries tipped to succeed China

A new report has identified 16 countries poised to succeed China as the global driver of manufacturing growth.

Investments | 31 Jul 2013

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