DAVID Cameron is not having an easy time in China. Instead of idle rhetoric about trade and cooperation, Cameron’s visit has been overshadowed by human rights concerns, by global imbalances, and, perhaps most surprisingly, by a dispute over the symbolism of the poppy. China is one of the world’s most exciting countries, but it is also one of the most difficult for Westerners such as Cameron to access. The growth rates may look stunning, but investors need to be very careful.
Certainly China has witnessed an economic miracle. It has grown at a rate of 9.3 per cent for the last twenty years and its current account surplus this year should total around $250bn (£156bn). The Chinese government has celebrated by spending tens of billions of dollars on dramatic jamborees – £20bn on the Beijing Olympics, £38bn on the Shanghai World Expo – and for many, the austerity of the communist economy seems to have gone for good. Rising real incomes, a growing middle class and steady economic liberalisation all make China look like a fantastic place to invest.
But unfortunately, investing in China is not easy. Growth has been concentrated in infrastructure, manufacturing and heavy industry, all sectors dominated by large government firms. The Chinese government has restricted access to the Chinese stock market, keeping investors out of many of the most successful parts of the economic miracle.
Thanks to that, British investors wanting to get exposure to China have tended to have to buy stocks listed on the Hong Kong stock exchange. Several firms offer exchange traded funds (ETFs) with significant exposure to China based on Hong Kong stock exchange indices. Both db x- trackers and iShares offer ETFs linked to the FTSE Xinhua China 25 index, which is made of Hong Kong listed shares.
Recently, however, investors have also been offered more direct access to Chinese equities. Credit Suisse offers an ETF linked to the CSI 300 index, which tracks the share prices of the most liquid Chinese companies listed on the Shanghai and Shenzhen stock exchanges. Stocks listed on Chinese mainland exchanges have tended to be much more volatile, but they have also offered higher returns.
Perhaps even more important than returns is the fact that Credit Suisse’s fund offers exposure to different sectors of the Chinese economy. Unlike developed world ETFs, ETFs available in China are arguably not particularly well balanced. Both the CSI 300 and the FTSE Xinhua 25 have large concentrations of financial stocks for example – both of around 47 per cent. The Xinhua 25 offers a lot of exposure to telecoms, however, while the CSI 300 has more industrial and energy stocks.
Unfortunately, neither offers much access to the consumer sectors or to small sized firms – both of whom ought to do well over the next decade. Consumer goods make up just 1.63 per cent of the Xinhua 25. Though it looks unlikely that much will be achieved at the G20 meetings starting today, most accept that China needs to rebalance its economy towards a higher level of consumption, and so the difficulty of investing in consumer goods producers ought to be frustrating.
That is if consumer industries ever take off, however. Vitaliy Katsenelson, at Investment Management Associates, argues that China is in fact suffering from acute overinvestment in industrial capacity. He describes China as “the mother of all grey swans”, citing dangerous demographics and an unhealthy reliance on government driven growth. If he is right, lack of access may not be an altogether bad thing for investors.
China is now the world’s second largest economy, and investors would be silly to ignore the opportunities that it offers. But despite over two decades of reform, China is still a very difficult and risky economy for Westerners to venture into. David Cameron has been learning that, but investors will have to too.