China’s growth not so lopsided but markets are

You get immune to rapid change in China, with the pace of development clearly visible all around. One wonders how long it will still be considered a developing nation.  Importantly for institutional investors, the development points to a shift from reliance on exports to domestic demand-driven growth. Those who picked the trend from a couple of years ago have already been rewarded.

China recently became the fifth largest investor in the world, in foreign direct investment terms, despite a slight slowdown over the past 12 months. While the world’s foreign direct investment slumped 40 per cent, China’s slipped just 2.6 per cent.

But the pace has again picked up, with China’s foreign direct investment rising 20.7 per cent in the seven months to July, pushing the country up from 12th in world rankings to fifth. About 70 per cent of the investment is within Asia.

This still only accounts for a little over 5 per cent of the world’s total foreign investment, indicating plenty of room for further growth.

While the Chinese economy remains lopsided by developed nation standards, the country is rapidly moving towards greater balance. There was even a rare trade deficit in March. The overall trade surplus is expected to drop from $190 billion to about $150 billion over this calendar year, thanks to a concerted effort to increase imports.

The relaxation of investment restrictions is occurring on an almost-daily basis. Last week, for instance, the Government announced it would allow insurance companies to invest up to 10 per cent of their statutory assets in private equity and real estate.

The lopsided nature of the Chinese sharemarkets is probably the most annoying factor for foreign investors. The contribution to China’s GDP by privately-owned enterprises has been rising for several years – from 54 per cent in 2005 to 71 per cent last year. However, privately owned enterprises account for only 4 per cent of the FTSE Xinhua 25 index.

The 1,869 companies on the China ‘A’ shares market have a total market cap of $2.88 trillion, not much more than Hong Kong’s $2.18 trillion from 1,170 listings. But the 178 new listings in China last year raised $31.36 billion, compared with $6.43 billion from 28 new listings in Hong Kong.

Specialist China funds management firms tend to steer clear of the top 25-50 companies because they are heavily skewed to financials and energy, on the one hand, and they are also dominated by state-owned or partly owned enterprises.

As one foreign manager said recently, the state-owned enterprises can sometimes be called upon to do “national service”, which is not necessarily in the interests of all shareholders.