After the collapse of the Far Eastern stock markets in 1998, a number of Asian emerging markets have...
After the collapse of the Far Eastern stock markets in 1998, a number of Asian emerging markets have come back with a vengeance. The current combination of external surpluses, strong domestic liquidity and rapid corporate restructuring in many Asian countries is extremely positive for long-term investors.
The main reasons for enthusiasm on Asian markets are as follows: The region's economies have passed the bottom of the cycle and domestic consumption is now picking up in many countries; valuations are still attractive on a global perspective; Corporate governance is improving, though hiccups have and will continue to occur.
Within Asia, China is one country we find particularly attractive. The US House of Representatives recently passed a Bill granting Permanent Normal Trade Relations (PNTR) status to China. This country's entry to the World Trade Organisation (WTO) seems inevitable by the end of the year.
China's accession to WTO will dramatically increase its international trade and promote further market reforms, making a strong impact on economic efficiency and boosting growth prospects for the Greater China region.
Despite its huge population, flourishing private sector and the growing importance of trade, the country still contributes only 3.3% of global merchandise exports and 2.5% of global imports. Nevertheless, China remains a competitive exporter, especially in labour intensive industries, such as light and textile manufacturing products. By eliminating tariffs and removing other non-tariff barriers in the form of quota systems, China can release its full export potential and, with the help of expanding direct foreign investment, benefit from higher domestic consumption too.
China's WTO entry will require it to abide by fair and impartial judicial practices, the peaceful settlement of disputes and, ultimately the rule of law. A more transparent legal framework should reduce the risk premium for foreign investors afraid of risking their capital on mainland China. Clearly this will encourage foreign companies to relocate global production capacity to China to serve the large domestic as well as international markets.
Many domestic firms will experience long-term benefits. Increased competition will accelerate the modernisation processes of China's best companies and destroy the worst.
Ultimately, China's WTO entry will provide countless investment opportunities. The substantial enlargement of the country's previously derisory representation in the MSCI stock market indices is only beginning. As foreigners become entitled to participate, so will overseas investors take a much greater interest in the most promising emerging economy of the world. Emerging markets are unlikely to perform well if Wall Street catches a cold but the recovery should be much quicker.
Angus Tulloch is joint head of emerging markets at Colonial First State Investments
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