On China and tipping points
Through the latter part of 2010 and first half of 2011 local fund managers have been urging South African investors to diversify their equity portfolios offshore. The offshore refrain is familiar, but the words to the song have changed slightly. Because instead of following the herd to near double-digit growth destinations such as China, Brazil and Russia, the prudent investment adviser is hunting for value in the developed world. The feeling is local investors will be better served in carefully selected US, European and Japanese shares than by a basket of Chinese equities, for example.
In recent weeks we’ve attended a number of presentations where China, the world’s second largest economy, featured. The latest of these was by Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI). He spent the best part of an hour discussing whether China was near a tipping point, and what the impact of a Chinese downturn would be on the domestic investment landscape. “The entire world is wrestling with the consequence of a cyclical hiccup in China,” began Van der Merwe. “There are some bubbles developing and we know the Chinese authorities will take the necessary steps to intervene directly in the economy!” How will the South African investment environment react if these corrective actions knock Chinese growth from its 8% pedestal to nearer the 5% mark in 2012?
The Red Dragon is massive, by any measure...
Some perspective will assist in untangling the macroeconomic discussion that follows. China is a huge player in the global economy. Population is a contributing factor, with China and India account for 36% of the world’s population. But the billion plus people in the world’s largest emerging economy dwarf India in the GDP stakes. In 2010 the United States contributed $14,658 billion to global GDP, the entire Euro-zone weighed in with $12,193 billion and China contributed $5,878 billion. South Africa, in contrast, managed only $357 billion. Compare China’s economy to ours – in rand – and we’re dealing with a R41 trillion to R25 billion mismatch!
Van der Merwe provided some statistics from Beijing Capital International Airport to illustrate the country’s economic activity. The airport, totalling some million square metres, was constructed in just 27 months. In 2005 it was ranked as the 14th busiest airport with some 41 million passengers – and last year it overtook London’s Heathrow as the world’s 2nd largest with some 73.9 million passengers. The airport also overtook Memphis International in the freight handling stakes, moving 4.17 million tons of freight last year!
On growth, money supply and inflation
What’s happening in China this year? “It appears as if China’s growth is beginning to roll over,” observed Van der Merwe, pointing to a chart of the country’s GDP growth stretching back as far as 1994. The critical unknown is how “deep” the correction will be, though analysts will find solace in the 5%-plus GDP growth the nation maintained through the recent global financial crisis. A closer assessment of China’s intervention in the economy through money supply and interest rate tweaks provides further positives.
China stimulated its economy through 2009 by providing additional liquidity (money supply) to bolster businesses. This additional cash filtered down to the general economy (including private consumers) where it sent asset prices (China’s high-end residential property market is near bubble territory) and inflation higher. The good news is China has taken the heat from this potential liquidity pressure cooker by reducing money supply consistently since Q3 2009.
This is part of the reason the Chinese premier believes inflation is coming under control. Authorities there hiked interest rates another 25 basis points a couple of weeks ago and believe this will be the last upward move for now. “We believe China is ahead of the curve In terms of the rest of the world, so the 25 basis point hike is probably the end of it,” said Van der Merwe. He believes that a Chinese ‘hard landing’ is extremely unlikely!
Get your Chinese exposure locally
How can you profit from the Chinese growth story. SPI is keen on a number of locally listed shares that should benefit as the Red Dragon powers ahead. China is moving up the value chain and its future economic growth rests squarely on the shoulders of its consumers. This trend is evidenced by the 15% compound annual growth rate in Chinese retail sales going back five years! As wages improve Chinese consumers are shopping for luxury brand items, making global luxury goods manufacturer and distributor Richemont a good bet. The commodity story is far from over too, and SPI favours companies such as BHP Billiton and Anglo American to benefit from China’s insatiable demand for base metals (most notably copper, zinc and iron ore).
Editor’s thoughts: As I put the finishing touches to today’s newsletter I noticed that ratings agency Moody’s had warned investors about corporate governance issues among Chinese-listed firms. It seems retail investors entering the Chinese stock market directly are on a hiding to nothing! Have you got any horror stories about investing directly in China – we’d love to hear from you? Please add your comment below, or send it to [email protected]
