Capital Comment: China is in difficulty but it’s certainly cheap for investors
ONE Chinese economist suggested on Monday that five straight quarters of growth at less than 8 per cent was “a clear sign of financial distress.” I would dare him to say the same to the Spanish Prime Minister. But the comment did come shortly after confirmation from the Chinese government that the country’s second quarter growth was in line with expectations – albeit generally on a downward trend at an annualised 7.5 per cent. This is not a crisis, however. Yes, China has some issues to sort out, but doesn’t everyone? Just look at the Australian Cricket team.
The main issue confronting the Chinese economy is credit. There has been too much inefficient lending and borrowing, much like in the US and Europe. China has been able to benefit in the near-term by growing very quickly, but the theory is that one day the credit bubble will burst. Payment defaults will ensue, and all of a sudden borrowing might become impossibly difficult, making growth a hard thing to come by. Of course, this is concerning to a potential investor. But the Chinese government is alive to the threat. It has put in place a series of measures which will undoubtedly hurt the economy in the short-run, but which will be in the interests of long-term prosperity.
These are also the kind of decisions rarely made in Western economies, where popularity and short-term gain are the fashionable choice. By tightening credit and unsafe lending, the Chinese are swallowing a smaller pill now in the hope of avoiding needing to take cyanide later down the line.
China’s huge recent growth has predominantly been export-led. But as wages and costs rise, its relative competitiveness is decreasing. Many “things” we currently have are made in China, but this will change as global companies reduce manufacturing in China as cheaper, more efficient locations and methods appear elsewhere. The country’s current aim is to get its huge and growing middle class to start spending, and turn its economy into one based on consumer-led growth.
These issues aside, the Chinese still have an insatiable work ethic, and productivity levels are rising. China puts great emphasis on hard work and personal drive, which is drilled into its students from a young age. With a population of over 1bn, and GDP being a measure of labour force multiplied by productivity, you get a big number. In short, China will undoubtedly be the dominant economic force in the world at some point in our lifetimes. It’s a matter of when, not if.
So, is it the place to invest? Anthony Bolton, one of Britain’s most decorated stock pickers, threw his attention to China a few years ago, with the Fidelity China Special Situations fund. He has recently resigned after what was only ever intended to be a short-term “asset allocation” appointment. Nonetheless, China is certainly very cheap at the moment and many funds are priced at a discount to net asset value. As a long-term option, one of these funds certainly could look very appealing.
Will Nicholls is a dealer at Capital Spreads.
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