China grows and grows
January 4th, 2011
In 2005 I forecast that China, then the sixth largest economy in the world at market exchange rates, would be the third largest, ready to challenge Japan for second place, by the end of that decade. In the second quarter of 2010 China overtook Japan as the world’s second largest economy.
There is no great sign of the pace slackening. It is true that China has inflation worries today. Interest rates were raised to 5.81% on Christmas Day 2010. Bank lending and property speculation is being reined in. However, the New Year opens in China with a huge 20% increase in the Minimum wage, following on a similar rise in it in July of last year. The Chinese regime wants to limit price inflation, but it also wants to make sure Chinese consumers and lower paid workers participate more fully in China’s success than before. They are creating much more effective domestic consumer demand to go alongside the phenomenal export success.
The Chinese domestic stock market performed poorly last year. Foreign investors fared a little better, with small positive returns available on the main ETFs. Worries about monetary tightening, fears of the inflationary dragon, and uncertainties about the politics of the region with the Korean conflict and rows with the US surfacing kept shares down.
The bears argue 2011 will bring more of the same. Well it might in the early months, as the authorities complete their policy to squeeze inflation down. The fact that they have set a new higher target of 4% implies they do not wish to be fanatical about it. I detect a strong wish to keep the growth of incomes and jobs running.
I like Chinese investment for 2011. The multiple of earnings on the Index is only 13 times compared to 17 times in the USA. The Hong Kong Corporation Tax rate remains at a low 16.5%, and the mainland rate at 25%. Personal income tax in Hong Kong has a top rate of 15%, and on the mainland of 45%, compared to 50% in the UK. The Chinese authorities follow policies which promote industry and export led growth. The Chinese minimum wage which is expanding so rapidly is still only around one tenth of the UK one.
If China continues to grow at around 9%, the trend rate of recent decades, and the US grows at 2.5% a year, by 2020 China will have as large an economy as the USA’s. If anything like this happens you should expect great growth in the Chinese Stock markets, as more companies come to market, as profits grow, and maybe earnings multiples used to value shares expand as well. Any currency revaluation which many expect would bring a further bonus to the investor. It is a sobering thought that when China reaches parity with the USA’s output, income levels will still only be around one quarter of US levels per head.
China was only 2.3% of the MSCI All Country World Index at the end of 2009. It could easily be three to four times that proportion by 2020. That’s why we recommend a decent position in longer term risk bearing portfolios to enjoy the ride.
