The Shanghai Composite Index is one of the worst-performing global stocks markets, having lost nearly a fifth of its value since the start of this year.
It is difficult to pin down exactly what has caused its dismal performance. Growth has certainly moderated, but most analysts now think that China will have the “perfect” slowdown: the economy won’t overheat and inflation will remain contained. The latest economic data signal just that: there are signs of weakness, but things aren’t falling off a cliff. Industrial output growth dropped to 13.4 per cent in July on an annualised basis and retail spending slid to 17.9 per cent, down from 18.3 per cent in June.
These are growth rates the western world can only dream of. So should investors go long of the Chinese stock market from here? No, says Martin Arnold, a senior research analyst at ETF Securities. He says that investors should consider the renminbi as an alternative investment to Chinese stocks: “There are some pitfalls for investors in the stock market. There is less transparency in the corporate environment compared to the west and stocks are more volatile.”
Arnold says that foreign exchange is a purer way to access China’s macro economic prospects. And after the announcement from Beijing that it will re-value the currency – it has operated a de facto peg to the dollar since 2008 – investors could be looking at a 20 per cent appreciation of the renminbi against the dollar over the next five years. Both HSBC and ETF Securities offer investors exposure to the renminbi; a return of 5 per cent per year is pretty good when cash rates in the UK are at 0.5 per cent.
And now could be an opportune time to make the investment. China’s well-publicised trade surplus with the US is gaining even more ground. It stood at $26.2bn in June, up from $22.3bn in May. UBS economist Tao Wang says that this will increase pressure on the Chinese authorities: “we think the strong export performance would provide support for allowing the renminbi to appreciate somewhat faster in the next month or two, by 2-3 per cent against the US dollar.”
Riding the coat tails of China’s growth and ditching stocks in favour of the currency, could offer good returns.