Before you think about buying into China, there are three things you need to know.
Investing success in China will depend on the advice and insights you get. Perhaps a Chinese connection will set you on the right course. That’s why Kris decided to launch the New Frontier Investor service.
You will get the advice, insight, analysis and research.
So, what can you expect from China and what should you look for before you take the plunge?
An economy in transition
The first thing that you need to keep in mind is that China is an economy in transition. It has grown at an average rate of 10% over the last 30 years. It has achieved industralisation and modernisation at an amazing speed.
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China has grown from a poor country to a middle income country. Its economy, finances and military might are a formidable size.
However, there is a catch.
China has grown with a focus on its manufacturing industry and fixed investments. This means it has thrown huge amounts of money at heavy and light industries. This includes energy, steel, machinery, paper and pulp, and other industries.
It’s not hard to understand China’s past growth model.
It’s creating industries at scale. The government initiates favourable policies and fixed investments into basic industries such as steel production. It then allows private money into the system through the banking sector.
This results in a strong positive feedback loop for real wage growth. This powers consumption, which leads to more investment.
Through this process, China has made entire industries out of nothing. It’s important to remember that, from nothing. However, the growth really has been in basic industries, not in services and technology.
Now China is at a crossroads. China will change gear to focus growth on private consumption, services and high value-added products such as technology.
This is where you’ll see the future growth. In fact, the high growth companies have performed much better than the traditional industries on the stock market in recent years.
This is what I call ‘The Old China versus the New China’. Betting on Old China will mean benefiting from the overall growth of China’s economy. However, the New China is where you’ll find the most exciting growth.
How long are we staying?
The second point is how long will all this take? Stock market cycles usually go for 7–10 years. With financial crises becoming more frequent in the last few decades, the stock market cycle has become more volatile.
However, you need to think about this carefully. Because the emerging markets, including the Chinese market, will move in sync with the global business cycle and the commodity supercycle to some degree.
You’ll have times when market retreats for a longer period of time. This could be for anything from several months to two years — you’ve seen this play out in China over the past two years.
The fact is that economic development requires time. So for you to enjoy the full benefit of China’s growth, you need to have the patience to stay long enough and plan accordingly.
RMB versus the Aussie dollar
Exchange rates have a big impact on stock returns. When you invest in a high growth economy from a low growth economy, you tend to see the high growth economy’s currency fall.
This is because high growth usually leads to more inflation and higher nominal interests rates. This causes the currency to fall.
The Chinese (Renminbi or Yuan) RMB has fallen against the Australian dollar over the years, but not by much. This is because the Chinese RMB operates in a fixed exchange regime. This means the government controls the currency.
The Aussie’s rise against the RMB was also due to strong economic fundamentals and high real interest rates in the Aussie economy. This pulled money into the country, causing the Aussie to rise against other currencies.
The Chinese RMB will likely rise in the long run due to a relaxation of the fixed exchange rate regime. With high growth and controlled inflation, the RMB will likely gain as the Chinese financial market opens up.
This is great for investors. A rising RMB is good news when you convert the investment value back to Aussie dollars.
So, keep all this in mind. You need to know this when you’re thinking about emerging markets.
Ken Wangdong+
Emerging Markets Analyst, New Frontier Investor
From the Port Phillip Publishing Library
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