The strong growth witnessed by China is expected to continue following a good performance in the man...
The strong growth witnessed by China is expected to continue following a good performance in the manufacturing sector. China has a cheap labour base and foreign companies have used it to outsource production.
Foreign investment has increased in the area following entry into the World Trade Organisation (WTO).
But China is not without risks. Although the government is creating infrastructure to improve the domestic economy, it does not readily provide information about what is going on in the country. And fund managers are still unsure what impact the Sars virus will have on the country.
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.'
Negyal explains China is one of the cheapest places to do business. Foreign companies are relocating to China and using it as a manufacturing base as a way of cutting costs.
According to David Riddle, senior fund manager at Legal & General, there was 17.2% industrial growth in China, 33.5% export growth, 52.4% import growth and 9.9% GDP last year.
He says the 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. In the automobile industry there has been a 100% increase in car sales following the government's decision to remove tariffs in this area.
Negyal thinks there is a still 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 also caused a huge surge in foreign investment. This increase is expected to feed through into higher consumption. The government has 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. This will help support economic growth. 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.
However, China is not without its risks and problems. Samir Mehda, director at Lloyd George, says: 'The problem with China is it is difficult to determine accurate information from the government regarding the state of the industry and the economy.'
According to Mehda, there is a risk to growth if foreign companies decide to re-locate their manufacturing bases to other parts of the world. This could have a severe impact on the Chinese economy if this was to happen. Microsoft has recently shifted production from Asia to Mexico.
Equally, if the severe acute respiratory syndrome (Sars) virus infected staff in a manufacturing plant which had to shut down operations, this could impact a foreign company's outsourcing operations. The company may decide to seek other locations for production.
Mehda says it is difficult to predict the impact of the Sars virus and to know how long it will be around for.
Negyal thinks there was not an impact for manufacturing and consumer figures in March for China. If it worsens, he says the impact of the disease will be global.
However, Riddle says Sars is only a short-term impact. One great opportunities for growth area in China is the travel industry. Only 1% of Chinese people travelled abroad in 2001 so there is great opportunity for this to increase. As the domestic economy begins to prosper more people will travel domestically or abroad.
He adds it is likely the government will be forced to be more open about the information it gives to the public. For example, the government originally covered up cases of Sars until the World Health Organisation demanded to know the full scale of the situation.
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