TODAY is the first day of the Chinese year of the rabbit. And rather like rabbits, the world’s statesmen are caught in the glare of China’s ascent. Economists are falling over each other to predict when China’s nominal GDP will overtake America’s, while foreign policy wonks are weighing the implications. Goldman Sachs reckons it could be as early as 2027.
While China’s rise might be a headache for international relations, however, it has been a boon for the global economy. Investors in China have done particularly well. Though the Chinese stock market has not yet reached its 2008 high, the MSCI China index is up 109 per cent on 2005.
Some managed funds have done much better, by exploiting the relative inefficiency of China’s capital markets to find often astonishingly cheap investments. The JPMorgan Chinese fund has outperformed the MSCI Golden Dragon benchmark by 28 per cent since Howard Wang took over its management in 2006, for example. Others have done well too.
But recently, even as China begins to assert itself politically, some have begun to question whether its economic miracle can last. Jim Chanos, a hedge fund manager who got famous by short selling Enron, has been betting on an economic crash in China for over a year now.
He argues that China is in the middle of an immense real estate bubble – pointing out that 70 per cent of the Chinese GDP is now spent on fixed asset investment. And “any time you try to take something that’s 70 per cent of your economy and rein it in, transition history tells us that usually the risks are to the downside.”
Most investors are more sanguine, but concerns about the high inflation rate have knocked confidence recently. China has raised its banking reserve requirements seven times since the start of last year, and it has increased interest rates twice since October. Investors – and not just those in China – are fearing a slowdown in growth. A World Bank report recently estimated that a 1 per cent loss in Chinese GDP growth would lead to a 0.5 per cent loss globally.
But fund managers in China still believe now is a good time to invest. Fidelity is seeking to raise £162m in a second issue of shares for its Chinese Special Situations fund, which invests in mainland China and Hong Kong. The fund manager, Anthony Bolton, is optimistic: “China has moved beyond the stage of an emerging market,” he says, “And there’s no shortage of interesting companies”.
Bolton argues that the Chinese government will be successful in constraining inflation without undermining economic growth. He also believes that by clever stock picking, deep research and hard work, investors can avoid becoming a victim of China’s notoriously crude corporate governance and unreliable management.
“The bad companies in China are really bad,” says Bolton. But by picking companies with managers who have spent time in the West (for example), or which have large cash reserves, he believes he can avoid them. The fund has large investments in consumer industries such as healthcare and alcohol, although Bolton stresses that he picks stocks by value. The fund also has a large proportion of its assets in small and medium cap shares.
But as Bolton stresses, the important point is to find good investments in a still under-explored market. China has probably passed the point where it is easy to find highly profitable investments without taking on a lot of risk, even given its booming economy. Investors will just have to hope that the year of the rabbit is a fortuitous one.