It’s time for some Eastern exposure

Kathleen Brooks
THE financial crisis has only highlighted China’s position as the next economic superpower. Increasing investor interest in the world’s most populous country is underlined by tomorrow’s launch of fund management firm Fidelity’s China Special Situations Fund, which is run by its star asset manager Anthony Bolton. He plans to invest in Chinese companies that are listed on stock exchanges in Hong Kong, Shanghai, Shenzen and the US.

But if investors don’t want to invest in the fund, how can they profit from China’s growth? Mike Kerley is Far East income manager for fund manager Henderson. He says that the key is to take a long-term view: “As China switches from an export-orientated economy towards domestic consumption there are some companies that could grow to be major global players in the next three to five years.”

Kerley is particularly interested in the banking sector. Although the authorities in Beijing have been hiking the amount of money banks have to hold on reserve to slow lending growth, Kerley says this shouldn’t hurt banks’ profitability: “If it slows to 15 to 20 per cent, that is still one of the highest lending rates in the world.”

Property also appeals to Kerley. He dismisses fears of an asset bubble, and says that demand for property remains high. Housing reform was passed in China in 1996, but since then only 10 per cent of the new houses allocated through this legislation have actually been built.

Investment opportunities that stand out to Henderson’s Kerley include the Bank of China, which is trading at a discount to its historical share price. He also thinks that Shimau Property is one to watch because of its exposure to tier two cities, such as Chongching near the Yangtze River, that are currently undergoing development.

Retail investors might want to think of using covered warrants – RBS offers a call covered warrant on Chinese shares listed on the Hong Kong stock exchange, known as the Hang Seng China Enterprises Index. The Bank of China and the PetroChina Company are listed on the index.

Fidelity’s Bolton intends to invest in state-owned companies because of the perceived favourable treatment they receive especially in terms of access to land and bank lending. Mark Williams, China economist for consultancy Capital Economics, says that the phrase of the moment in China is “guojin mintui”, which means “the state advances as the private sector retreats”. Although the Chinese authorities have pledged their support for small and privately owned companies, Williams says that state-owned companies will not give up their privileges easily.

But investment managers such as Henderson’s Kerley say that you should not ignore privately-owned companies. He says that Chinese firms are adopting the management practices of their peers in the West, and ultimately this will drive growth and performance in the future.

But isn’t investing in China risky? Fears that the authorities will apply the brakes on the economy too quickly are overdone, says Williams: “China’s monetary stance is still loose, they are just trying to remove the extra stimulus pumped into the economy at the peak of the financial crisis.” This might be the moment to go east.