Strong economic growth in China is expected to continue following good performance in its manufactur...
Strong economic growth in China is expected to continue following good performance in its manufacturing sector.
China's cheap labour costs are increasingly leading foreign companies to outsource production there, while foreign investment has also increased following China's entry into the World Trade Organisation (WTO).
Omar Negyal, fund manager of Pacific equities at F&C, says: 'The overall stance on China is positive. If the macroeconomy continues to perform well, China will have strong export growth.'
David Riddle, senior fund manager at Legal & General, says manufacturing costs are low in China with the average annual salary in Shanghai around $3,700. There are 22 million workers seeking manufacturing work, so salaries are expected to remain low.
The country has become an important producer of electronic equipment as well as automobiles, particularly following a recent government decision to remove tariffs on vehicles.
Negyal says there is still a long way to go in this area and huge potential for sales growth.
'The Chinese government is keen to attract foreign direct investment, and will continue employing methods such as tax incentives, as there is likely to be a positive knock-on effect of rising foreign direct investment on consumption trends in cities or industrial areas,' says Negyal.
The country's entry into the WTO has caused a huge surge in foreign investment, which is expected to feed through into higher consumption. The authorities have also invested heavily in infrastructure and other projects. Negyal thinks spending will shift towards rural areas, as the government wants to narrow the urban and rural income gap, which will in turn help support economic growth.
Riddle says travel is one area of opportunity for growth in China, with only 1% of Chinese people travelling abroad in 2001, highlighting the potential upside as the domestic economy begins to prosper.
To encourage domestic spending the government has raised salaries and cut taxes. But government spending is likely to be lower in 2003 than 2002 as fiscal deficits rose last year.
China is not without its risks and problems. Samir Mehda, director at Lloyd George, says: 'The problem with China is it is difficult to obtain accurate information from the government regarding the state of the industry and the economy.'
Riddle says it is likely the government will be forced to be more open about the information it gives to the public. For example, it originally covered up cases of severe acute respiratory syndrome (Sars) until the World Health Organisation demanded to know the full scale of the situation.
The dependence on foreign manufacturing outsourcing also leaves China vulnerable to labour competition from other markets, Mehda says, noting Microsoft has recently shifted production from Asia to Mexico.
This shift could be accelerated if manufacturing plants are forced to close down due to staff infection with the Sars virus.
Mehda says it is difficult to predict the impact of the Sars virus or how long it will be a concern for the market, although he says there was no sign of any impact on the Chinese manufacturing and consumer figures in March.
Manufacturing outsourcing to China.
Government spending on infrastructure.
Salaries up, taxes down.
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