China remains a dilemma for economic strategists who see it as not only an equity market with an alm...
China remains a dilemma for economic strategists who see it as not only an equity market with an almost unlimited upside but also one in which traditional investment criteria cannot be applied.
Doubt over the credibility of official macro-economic figures, management practices and the market-distorting influence of the Communist government means many foreign investors are cautious about their ability to apply a bottom-up, stock-picking approach to selecting Chinese equities. Perhaps not surprisingly China's expected inclusion in the World Trade Organisation (WTO) later this year is seen as promising future economic reform.
Alistair Thompson, head of the Pacific desk at Edinburgh Fund Managers, says Chinese macro-economic figures appear optimistic. However, the Edinburgh Dragon Investment Trust and the Edinburgh Pacific Oeic, both maintain only one stock position, China Telecom, due to concerns over management expertise in the region.
He is positive about the prospect of China being accepted into the WTO later this year, a move that will bring foreign competition into China potentially prompting widespread economic change.
Thompson says: "The macro-economic data coming out of China is reasonably positive. First quarter GDP growth was up 8.1% in real terms against a consensus of 7.6%.
"Inflation in March, according to the consumer price index, was 0.7%, which was positive for the first time in two years so it is turning around, and retail sales in March were up 7%. For us China has turned the corner as an economy but not from an investment perspective." Inclusion in the WTO should bring substantial improvements in the investment environment.
Thompson says: "There are many, many companies in the US and other regions who want access to the Chinese market.
"If China is admitted to the WTO it should bring in the foreign investment and technological expertise thatit lacks, and mean that the country takes another step forward in its growth phase."
Admittance would also see Chinese management techniques, accounting requirements and corporate governance improve. Yet the reform of state owned enterprises is still far from complete and remains a politically sensitive subject.
Nigel Morgan, economic strategist at Old Mutual, says that there is justified doubt in macro-economic figures and the forecasting coming out of China, its continuing poor levels of corporate governance and management and political interventions.
Still, China is an economy that as a long-term bet cannot be ignored, he says. Morgan says: "Normal rules of investment don't apply in China. We believe it is slowly cleaning up its act and improving for the foreign investor.
"Our aim is not really to evaluate the stocks but to have a position across a range of Chinese companies of the most secure kind with the best corporate governance and see how the political situation develops. The traditional ways to value stocks are so suspect in China that we believe our concern should be to hold a range of stocks that the government won't want to see fail."
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