Douglas Turnbull, Head of Chinese Equities, Neptune.
Although Chinese growth continues to slow, we expect overall Gross Domestic Product (GDP) growth to remain in the 7.5% range in 2014. The range of reforms introduced at the Communist Party’s ‘Third Plenum’ meeting at the end of last year will certainly have a dampening effect on growth but this is necessary to introduce higher quality growth – particularly centred around domestic consumption – going forward. The meeting set out a roadmap for the reforms which the new Party leadership and government wish to undertake going forward, and was significant in its apparently progressive range and depth. Accordingly it was very well received by the markets, primarily as it allayed concerns that necessary reforms would be neglected in favour of the status quo.
However, since then, sentiment towards China has turned negative once more. Investors have been concerned over ‘shadow banking’ issues, such as potential higher-than-expected default rates amongst loan agreements packaged as wealth management products, and the effect that these defaults could have on the system as a whole. However, we believe that this attitude mistakenly assumes too much similarity between China’s financial system and Western countries. Rather, we remain confident in Beijing’s greater control and oversight of their system, and thus their ability to successfully manage the Chinese economy.
Consequently, we believe that Chinese equities are currently attractively valued and that the market is prime for a re-rating. We believe that reform will separate China’s winners and losers but that the process of reform will be gradual. Therefore, we believe that you need to invest in China now to benefit fully from the market’s re-rating, as when the market catches up it will be too late.
The recent weakness in the renminbi (RMB) versus the US dollar is within the pre-existing trading bounds as set and tolerated by Beijing. Indeed, the People’s Bank of China (PBoC) said in 2013 that it planned to widen the plus/minus 1% daily band in the future before confirming on the 19 February that it was going to widen the bands in 2014, albeit without giving an actual date. This current volatility is tolerated as Beijing wants to stop the mentality that the currency is a “1-way-bet” to prevent the potential hot money inflow problems that this could cause. Furthermore, the economic fundamentals that have driven the strength in the RMB have not suddenly collapsed in China. Whilst nowhere near as undervalued as it once was and – whilst it may not appreciate as fast or as far as external observers may clamour for – we believe that the RMB still has further to appreciate in the medium term.
If you would like to discuss your own personal investment needs, please do not hesitate to contact us, and we can arrange an appointment for you with one of our financial advisers.