China's economy can be viewed from two perspectives - glass half full or half empty. Those taking the latter view might see economic growth slowing to its lowest level in recent years as reason for concern. Or, like me, you might view GDP (Gross Domestic Product) growth of 7.8% in 2012 as impressive, particularly when compared with moribund Western economies.
The slowdown was expected. Double-digit GDP growth was unsustainable and the government was targeting a more realistic 7% to 8% for 2012. The slowing global economy also played a part, dampening demand for exports. The year ended on a high note in this respect as exports to the US and Europe increased significantly as the economic outlook improved.
The Chinese government remains in better financial shape than Western counterparts. It has more flexibility to stimulate or slow growth when necessary. When growth slowed too much in the first half of 2012 interest rates were reduced to encourage lending and investment. This fed through to the property sector, with construction, house prices and sales volumes improving. Infrastructure spending was also increased with heavy investment in railways.
While the government is fortunate to have the firepower to boost growth when necessary, this highlights China's on-going reliance on exports and investment. China remains exposed to the ups and downs of the global economic cycle.
Efforts to rebalance the economy are underway. Increasing productivity and factory automation mean higher value goods can be produced, improving the prospects for business profits. A more educated, skilled and productive workforce is commanding higher wages. This feeds through to rising living standards and increased consumption. The aim is to rebalance towards domestic consumption and high-quality exports, reducing reliance on selling cheap goods to the West.
Achieving this aim should be positive for the Chinese economy and many domestic businesses. Furthermore, the benefits should spread through the region as a whole. Chinese businesses will benefit from selling their higher value goods across Asia, while other companies in the region should benefit from increased consumption within China. Lower-value manufacturing is likely to move from China, to Vietnam, for instance, boosting other regional economies.
Asia should be viewed as an increasingly interconnected region, although it still remains higher risk. For this reason I believe a broad Asian fund could be the best way to gain exposure. One of my favourites is the First State Asia Pacific Leaders Fund, managed by Angus Tulloch and Alistair Thompson. They believe buying quality business franchises with robust balance sheets, run by excellent management and not overpaying for them, will generate strong long-term returns. Major recent purchases have included Li & Fung, a Hong Kong-listed consumer business, as its share price fell on the back of economic woes in Europe and the US; and Cathay Pacific, a well-managed airline trading on attractive valuations.
We rate the First State Asia Pacific team highly. Since the launch of this fund in December 2003 it had grown by 298% compared with 183% for the average fund in the sector, though past performance is not a reliable guide to future returns. We believe it represents a good choice for sophisticated long-term investors seeking broad exposure to the Asia Pacific region.
|01/01/2008 to 01/01/2009||01/01/2009 to 01/01/2010||01/01/2010 to 03/01/2011||03/01/2011 to 02/01/2012||02/01/2012 to 01/01/2013|
|First State Asia Pacific Leaders||-16.21%||34.83%||26.67%||-7.98%||18.45%|
|IMA Asia Pacific Excluding Japan||-33.22%||52.44%||21.44%||-16.4%||16.68%|
* Figures to 01/01/2013. Source: Lipper
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