Even the most bullish investor in China should consider some basic factors before piling in to the market through collective investments or other means, according to comments from senior investment managers.
Paul Niven, director head of investment strategy ISIS Asset Management points out the problems China’s leadership will have in maintaining the existing model of boosting output based on cheap labour, even as outside investors buy into initial public offerings and Chinese stocks at prices that he considers too expensive.
Interestingly, this message is somewhat supported by Mark Mobius, managing director Templeton Asset Management, and manager of the Templeton Emerging Markets Investment Trust, who also points to risks, despite both his performance and faith in the region's ability to produce returns over time.
Mobius’ reservations can be summed up as liquidity issues and the possible lack of rule of law, which leave investors exposed to possible major losses if events take a turn for the worse.
An example of a liquidity issue is Malaysia’s decision in the late 1990s to impose currency controls, effectively prohibiting foreign investors from pulling their money out as the country followed the rest of Asia into economic crisis. Mobius calls that decision "indefensible"
Rule of law including shareholder protection is fast becoming an issue in China, because while it has signed up to World Trade Organisation membership, the rights accorded investors, for example, buying directly into Chinese listed firms are not necessarily at the same level as those accorded investors in the West.
Niven sees examples of legal issues in the existence of bribes, that is, "taxes" still forced on local populations and businesses by Chinese Communist Party officials, the total cost of which is unknown.
There is, however, a degree of difference in general opinion between Niven’s and Mobius’ views on what sort of weighting China and the rest of Asia should account for in investors’ portfolios.
Mobius says he can see a day when Asia should account for 50% of portfolio weightings, against 20% for Europe and the Middle East, and 30% for the Americas.
Niven says China will continue to grow because of its influence on the global labour market, but in the short-term investors should not get carried away with long-term issues. He sees GDP growth falling there next year as the government struggles to juggle competing parts of the economy bearing in mind the need to create millions of new jobs for displaced agricultural workers.
However, Mobius is not deterred. His long-term theme is that even if only through their sheer population numbers, China and India together will take a considerably growing share of the global economy.
The WTO will speed up this change by changing long-standing trade patterns. Already, exports from Korea to China are greater than to the US. Similarly, exports from Southeast Asia to China are growing at a faster rate than those to the US.
Templeton’s goal is to follow the themes of consumers, commodities and convergence (in Eastern Europe regarding the EU), which throw up examples such as China Mobile, which with 118 million domestic subscribers alone already dwarfs Vodafone’s entire global subscriber base.IFAonline
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