China's bullish economy should survive despite western failings

Published on Friday 6 February 2009 20:20

THE Year of the Bull may be underway but the Chinese economic outlook is the most bearish in years. Few argue that China remains the engine of future world economic growth, but it suffered along with other emerging markets last year as the brakes were slammed on the global economy.

The theory of decoupling, which contends that the economies of the developing world are increasingly diverging from those of the west, has suffered a blow to its credibility as developing economies have followed the US and Europe into decline.

Howard Kippax, senior investment manager for Asia Equities at the Scottish Investment Trust, said the Chinese economy had been dragged down by the global credit squeeze.

"As China approaches its Year of the Ox, it faces a number of problems, including a weakening economy, falling house prices and the spectre of rising unemployment," said Kippax. "China's electricity usage has started to decline, as has the throughput of goods at some of its major ports. There are also continuing news reports of factory closures and job losses, particularly in the sectors focused on the export of consumer goods."

Despite an exporting shift towards inter-Asia, China's exports tumbled as the US consumer stopped spending. In the last three months of 2008, GDP growth slumped to 6.8 per cent and while that rate is one that most countries can only dream of, it contributed to an annual growth rate of 9 per cent that was China's weakest in seven years.

United Nations economists believe China's GDP growth may slow to around 7 per cent this year, its slowest rate in nearly 20 years, while analysts at Capital Economics believes that, with western consumer demand set to continue slowing this year, growth could slip to just 5 per cent.

Forecasts in China are around the 8-9 per cent mark, based partly on the Chinese government's fiscal stimulus programme and infrastructure investment.

But some observers believe the Chinese government's response to the decline will be sufficient to stop it slipping further.

Dr Mark Mobius of Franklin Templeton, the leading authority on emerging markets investment, believes China is well poised to bounce back this year.

"It has the resources to do it and it is determined not to drop below that level," said Mobius. "China is taking lots of measures to keep things moving. For example, it is ramping up its infrastructure spending, lowering tax and increasing payouts such as vouchers. That's important because the money goes right through the system."

More specifically, the government announced an RMB 4 trillion (427 billion) spending package on infrastructure and programmes in November, with the aim of creating more jobs and boosting industries.

It also said that, if necessary, it was prepared to deliver further packages to stimulate the economy.

This week Chinese premier Wen Jiabao said the Chinese government may take fresh measures to boost its economy beyond the existing rescue plan.

Sam Mahtani, fund manager on the F&C emerging market equities team, believes the aggressive fiscal action by the Chinese government has bolstered sentiment. "The rapid slowdown is now evident in all areas of the Chinese economy but the action of the authorities, such as their pledge to inject $586bn into the economy, proves their commitment to ensuring structural growth does not come under further threat," he said.

As far as the investment opportunities are concerned, most pundits believe little has changed. China has always been a long-term story and that hasn't changed despite evidence of the country's vulnerability to the global economic slowdown, said Juliet Schooling, head of investment research at Chelsea Financial. "There are setbacks everywhere from the credit crunch but the long-term picture remains very positive."

And while there are risks in investing in China, acknowledged Mobius, he claimed the benefits of investing in the fastest growing major country in the world with the largest population continue to outweigh the risks.

How investors take advantage of that depends on their risk profile and the size of their portfolio. "If you're a small investor you would get exposure to China through emerging markets or Asian funds in order to spread the risk," advised Schooling. "But if you have a large portfolio you might look for a small percentage in a China specific fund."

She picked out the First State Greater China Growth and the Jupiter China Opportunities funds for investors seeking country-specific growth.