China's 'Quality Not Quantity' Strategy Yields Results
China is at a turning point in its economic policy, which will have major implications for investors, according to emerging markets experts. Economists and fund managers at ‘Investment implications of China’s transition to a new economic growth model’, jointly hosted by Standard & Poor’s Equity Research and the Chartered Insititute for Securities & Investment (CISI) gave an assessment of the current focus on ‘quality rather than quantity’ that the government was pursuing as it expanded into new sectors, including biotechnology and environmental protection.
Growth had slowed in China’s terms but was still comparatively rapid, boosted by the buoyant property sector. However, high property prices, along with high food prices, are also driving inflation, despite the government’s efforts to reduce it. Larry Brainard, chief economist at emerging markets research consultancy Trusted Sources, predicted that export growth would slow from its current rate of 35% to 10-15% next year. A rapid growth in wages, at more than 20%, was also driving domestic consumption and forcing industry inland. Brainard said: “A slowdown in China means 25% growth, so we’re not talking in western terms here.”
China’s current economic plan was characterised by efficiency, according to Philip Ehrmann, joint head of the far eastern equities team at Jupiter Asset Management, who emphaised that the desire to move to a more domestically-driven economy was paramount. Ehrmann added that the knock-on effect this was having on industrial competitiveness was attracting investors as the focus was increasingly on profitability rather than growth “Please don’t confuse profitability with growth – there is now much more of a focus on growth,” Ehrmann said.
He highlighted the key sectors affected by policy reform in the country, including waste management, real estate and construction and healthcare and education and transport. For example, the country had seen the largest building programme in railways globally since the US in the 19th century. In healthcare, a US$10bn investment programme was set to fund 13,000 rural clinics and reform service provision. Notably, China invested US$84bn in energy efficiency in 2010, against a US investment of US$24bn, driven by legislation but also fiscal incentives, corporate capital expenditure (capex) and longer-term consumer trends. There was also a new breed of entrepreneurially-driven companies, though Ehrmann cautioned that, as in other emerging markets in particular, these mid-caps were still volatile and accordingly represented more of an investment risk.
All this translated to an atmosphere where there is still considerable room for growth, which was highlighted by Bryan Collings, fund manager at Hexam Capital. One key reason for this, he said, was the increasing momentum of bank penetration. “Borrowing has legs – the Chinese are not that different from us [in their consumer spending habits], if at all.” Collings added that 50% of consumption was coming through bank cards, though credit cards had not yet achieved a popularity anywhere near the global average. He also noted that the insurance market was the biggest globally.
Hearteningly, the rapid growth seemed to be balanced by increased corporate governance awareness of investment risk in the country. “This is growing across the food chain,” Collings said. “Even in the last three years, [finance managers] have become much more willing to say: ‘Are you sure you should be buying that?'”