A number of commentators have highlighted China as a region likely to benefit from a global bull run, drawing attention to its attractive valuations following last year’s sell-off and GDP that is growing above 8 per cent a year.
Fidelity’s star manager Anthony Bolton has long lauded the country as a strong area for growth, in spite of disappointing performance from his China Special Situations investment trust, launched in 2010.
"It will become apparent in the next 12 months that the house-of-cards view that many have of China is wrong. We won’t see a hard landing and we won’t see growth disappear and that will lead to a reassessment of international views on China. It’s not going to be something that happens overnight but within 12 months I think the international view will change," he said.
Bolton believes lower inflation in China creates a positive background for further monetary policy easing.
"GDP growth will be in the 7-to-8 per cent range depending on how the international situation develops. Valuations are low and sentiment is still very cautious and my investment approach is to bet against these views. I am positive and bullish."
However, Martin Lau, who heads up the First State Greater China Growth fund, says it isn’t that simple.
"We continue to believe that Chinese economic growth will slow this year," he commented, citing a property bubble as one of the major potential pitfalls.
"We believe that liquidity has been too loose in China as a result of the very large stimulus package of 2008 following the global financial crisis," he said.
"This has resulted in an explosion of loans as a percentage of GDP, which has driven a substantial increase in inflation, in particular a significant rise in property prices. Prices in the major cities of Beijing, Guangzhou, Shanghai and Shenzhen have doubled or even tripled since 2006."
The manager thinks house prices are likely to fall as the government keeps a tight lid on the property sector, and does not want to burst the property bubble.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
According to FE Analytics, Lau’s First State Greater China Growth fund has returned 83.62 per cent over five years, compared with 51.84 per cent from its IMA China/Greater China sector.
Lau says rising wages present another obstacle to growth, while a high-profile fraud case may reinforce stereotypes about the unreliability of emerging markets and deter investors.
"Labour cost pressures are now significant in China and likely to continue to increase in coming years. The key reason is that the younger generation is better educated and more selective about the jobs they take. The government has also been keen to push for a higher minimum wage to protect lower-income groups."
"At a company level, worries about corporate governance have come to the fore recently. In June, Muddy Waters Research, an independent equity research house, published a report calling into question the accounting practices of the Chinese forestry company Sino-Forest. Its share price fell like a stone, impacting some big names in the investment world who had taken significant positions in the company. Institutional investors have filed a very substantial claim against Sino-Forest which is alleged to have exaggerated assets and created non-existent ‘artificial intermediaries’ to boost revenues."
Despite these problems, Lau believes there are many reasons why the long-term argument for investing in China remains strong.
"Consumption growth is on a very positive trajectory in China and higher wages should lead to more spending power," he continued. "Consumer demand will become an increasingly important factor in the Chinese economy as the country moves away from a growth model based on exports."
"The urbanisation of China is another key long-term trend which should drive consumption. The need for more infrastructure in inland and rural areas should also provide support for fixed-asset investment which is weakening in coastal areas."
"We believe that Chinese industry will continue to move up the value chain, becoming more innovative, and providing investment opportunities in a more diverse range of companies. The country now has a pool of 6 million graduates each year to call upon."
"Although concerns have been raised by the Sino-Forest debacle, we anticipate that over the long-term, corporate governance will improve in China, although progress is likely to be slow."