Powerhouse China entering new phase - JPM

Pinakin Patel, chief portfolio manager of JPMorgan's Far East Equity desk, says there is a "general misconception" that other nations have moved up on the value chain, responding to demand for higher quality goods, while China has remained as a "workshop".

Patel says China, on the contrary, is in a transition phase from low end to high end manufacturing.

He says with margins affected by high operating costs, increasing wages and more regulatory requirements, as well as export tax rebate changes, low-end companies must either move their manufacturing bases to a cheaper area - like Vietnam - or move higher up the value chain.

“Traditional low-end businesses in China are seeing their margins squeezed, narrowing to 3% in the early parts of this year,” says Patel.

However, higher end businesses are now making margins of 4-5%, commanding 45% of China’s export market, while low-end business exports now account for 25%.

While inflation remains the top priority for China, a shift in export type and long-term drivers still present opportunities, says Patel.

China’s ability to maintain export margins is threatened by rising costs of food and resources together with increasing wage growth which has climbed by 19% in the first quarter of this year, he says.

“Inflation, export slowdown and fuel prices are the biggest swing factor. The Chinese bank also needs to face the issue of hot money inflows to cool the economy," says Patel.

However, he believes strong fundamentals and the drivers of consumption, infrastructure and exports will ensure China’s continuing growth, with the Chinese government forecasting 10.3% GDP growth for next year.

IFAonline

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