Despite worries over Severe Acute Respiratory Syndrome in the Far East, China has exhibited an astonishing pace of economic growth.
Research house Credit Suisse First Boston expects Chinese gross domestic product growth to exceed 8.5 percent in 2003.
To put this in perspective, my estimates as of Sept. 29 are for GDP growth of 1.9 percent in Canada and 2.6 percent in the U.S.
China’s industrial production exceeded consensus estimates in August, rising 17.1 percent year over year. Export growth came in above forecasts at 27.2 percent.
Consumer spending, important in a nation of more than one billion people, is growing at between 8.5 percent and 12 percent per year.
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Also, 2003 is the first year that China will import more raw iron than Japan. It produced a record 18 million tonnes of steel in July.
With its rise in economic and industrial power, China has surpassed the United States as the world’s top destination for foreign direct investment.
It appears this pace will continue in 2004 with GDP growth estimates of around eight percent. Supporting this growth is an abundance of low cost labour.
Clearly, China is a global economic growth leader and offers investors investment opportunity.
But there are risks. For example, intellectual property rights are weak, creating considerable confusion and litigation involving Chinese technology companies. Also, the financial system is obscure, making it hard for investors to judge the health of credit markets.
The challenge is to find opportunities to benefit from the rapid economic expansion while avoiding the potential pitfalls inherent in a developing capital market structure awash with new foreign direct investment.
Investors have several ways to gain regional exposure to China:
- Mutual funds with direct exposure to China offer the greatest fund leverage on a regional basis. Only a few country-specific funds are available, but two with reasonable performance histories are AGF China Focus Class fund and Talvest China Plus fund. Between Jan. 1 and Aug. 31, the AGF and Talvest funds have returned 28.83 and 17.77 percent, respectively.
- Emerging market mutual funds with a regional overweight in Asian markets, such as China, offer less leverage to the country for lower risk. There are far more of these funds available, such as CI Emerging Markets fund and the Fidelity Far East fund. As of Aug. 31, the CI and Fidelity funds have returned 8.28 percent and 7.02 percent, respectively, year-to-date.
- Asian exchange-traded funds or ETFs provide diversified exposure. The MSCI Hong Kong index iUnit, which trades on the American Stock Exchange, attempts to mirror the performance of the MSCI Hong Kong Index.
- Closed-End Funds with exposure to China, such as The China Fund, which is listed on the New York Stock Exchange.
- Investors can buy stocks with direct exposure to China. Recent studies have shown that sectors such as basic materials, energy, utilities and industrials focusing on infrastructure benefit the most from investment growth in developing markets.
As a leading importer of raw materials and commodities, China affects commodity prices. Consideration should be given to multinationals and Chinese companies with listings on North American exchanges that provide exposure to commodity demand growth in China.
Given the expected future pace of economic growth, it’s prudent to consider China-related investments in your portfolio.
Discuss with your investment adviser how much China exposure you could carry in your portfolio.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca
