Domestic restructuring and M&A activity are helping to bring the Chinese economy further in line wit...
Domestic restructuring and M&A activity are helping to bring the Chinese economy further in line with more developed markets..
Diamond Lee, investment manager at Britannic Asset Management, says he is positive on the broad-based reforms imposed by China's government on housing, finance, social security and state-owned enterprises.
World Trade Organisation (WTO) membership, which is likely to be granted later this year, has also driven the government to foster an environment in which its businesses can prepare to withstand the introduction of foreign competition.
Adam Matthews, product specialist on Flemings' Asia desk, says the region's economic recovery has been both domestic and foreign led. Exports were up 30% year on year, in local currency terms, for the first six months of 2000, retail sales were up 10.2% and industrial output was up 11% in the year to May.
Lee thinks China's popularity has been triggered by the merger activity in the utilities sector. He says: "M&A activity came in two sectors first, power and airlines, but the market is getting too carried away with M&A expectations while ignoring the effect on the operational and financial aspects of the companies. The benefits to earnings and operational efficiency will be more of a medium-term story."
Matthews thinks recent corporate results show companies are benefiting from reduced stockpiles and capacity and greater demand for manpower as restructuring takes effect.
He is keen on the telecoms sector, with the cellular market dominated by two companies, China Mobile and China Unicom. China Mobile is the biggest holding in the Flemings China Flagship Fund at 9.4%. Matthews says: "The exciting thing about China's mobile industry is that it has 57 million subscribers and added 14 million between January and May this year. Subscriber growth is huge and, at those numbers, China will become the biggest market in the world by subscriber numbers."
WTO membership would allow foreign investors to take stakes of up to 15% in Chinese operations, which is why companies like AT&T and Brtish Telecom are making overtures to the Chinese mobile operators.
Matthews says the potential downside is whether the government will sustain its reforms. Lee says he is very bullish on the reforms but previous experience has shown that these programmes can change quickly.
"We had a similar bout of optimism three years ago but the combined social pain of restructuring and the Asia crisis caused the government to call the whole thing off," says Lee.
He thinks the biggest risks alongside government policy change are a likely economic downturn and the effect of WTO membership on the rural economy. China is still largely dependent on its export sector, he says, and with global growth slowing, it has to find something to take the place of exports as a driver of the economy.
Both fund managers agree that Chinese companies will have to improve their transparency and management. Until this is resolved, China's markets will still tend to be driven by macroeconomic factors rather than the performance of individual companies, according to Lee.
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