Next Chinese miracle to be consumption

As the political war of words rages about the value of the Chinese RMB, Asian investors are taking note of a big shift in direction for the policy-driven Chinese sharemarket.

At a conference in Beijing last week, investors were told that there were no “major” dangers to the Chinese growth rate this year, however the country’s economy needs to be restructured and this would become an investment theme for the future.

The restructuring involves a greater emphasis on Chinese consumption and less reliance on exports and investment as the main drivers of GDP growth, which was a heady 8.7 per cent in 2009 and is tipped to be close to 10 per cent this year.

One of the most senior economic advisors to the Chinese central government, Dr Li Yang, told the conference organised by Beijing-based funds manager Harvest Fund Management that while the economy would not become consumption-driven for some years, a range of measures were being taken to set it on this path.

“Our priority is to change the structure of the economy,” he told about 150 mainly Chinese institutional investors. “The financial crisis was not really a big hit (for China) but serves as a warning for our economic growth model.”

Dr Li, who is vice president of the Chinese Academy of Social Sciences, said China needed to encourage equity financing, even from foreign sources, to lower the leverage in its system.

He said private equity investing was on the rise in 2009 and this trend would continue.

Urbanisation was a strong trend which would play a more paramount role in the future, he said. This required investment in “social infrastructure” such as health care, education, sports, social security, research, tourism and financial services.

Li Kai, the CIO of Harvest Global Investments, the Hong Kong internationally orientated subsidiary of Harvest (which is 40 per cent owned by the Chinese Government, 30 per cent owned by Deutsche Asset Management and 30 per cent privately owned) indicated that the restructuring of the Chinese economy presented opportunities for thematic investors.

He said the policy direction, underscored at this month’s National People’s Congress, was for a more equitable society.

“This is a policy-intensive period,” he said.

However, the market had a current average P:E ratio of 13.5 per cent, which, while lower than historical valuations, still offered little upside in the current environment.

“The market is expecting a 6 per cent growth in earnings but we don’t know whether that will be realised,” he said. “We need to do our homework this year.”

Shao Jian, the assistant general manager and portfolio manager of Harvest in Beijing, said the sectors to be in at the moment were those in line with the future economic development, such as the “modern service industries”.

“If there is no change to the exchange rate,” he said, “there will be more opportunities in equities than bonds.”