The alluring China Story for stock investors is turning into a suspense classic. For about two decades investors have enjoyed the pick of stocks growing fat on China’s world-beating economic growth. At the same time rapid economic reforms opened a raft of promising companies to portfolio investment. But in coming months and years investors may find Chinese stocks are nothing special. In fact, China-related stocks may hit a very rough patch.
True, GDP growth of more than 7% a year is still impressive. However, expansion has slowed longer and deeper than most analysts expected in the last year and a half. Will new national leaders installed at the Chinese Communist Party 18th Congress on November 8 find answers to growing economic, political and social problems?
The head of research at one Hong Kong-based brokerage is skeptical. This veteran market-watcher, who asked that Equities not reveal his name or the name of his company, found skepticism served him well early this year when he stated correctly that China’s economic decline was more serious than commonly thought.
“I am afraid the ‘China story’ might be dead,” he told Equities in an email.
Stunning GDP growth in the double-digit range has been an “important ideology” for Chinese leaders, the analyst said, but new leaders may be forced to cut back. “Exports are dead, consumption is slowing with economic activities, more investments will create more long-term problems, …” he said.
In particular, traditional heavy reliance on massive fixed asset investment looks untenable. The huge stimulus promoted by the current leaders at the start of the Great Recession kept Chinese economic growth intact for awhile, but at a heavy cost. High inflation, corruption, poor projects and over-supply are now major problems.
New leaders led by Xi Jinpeng probably will initiate more limited spending targeted to more narrow segments of the economy, according to this analyst. The economy also stands to get a boost in 2013 because it will be the third year of the current five-year plan, and that is generally the peak year for capital expenditures. But the new leadership will likely forego large-scale stimulus programs.
Instead, the analyst said, “I think the government will start (an) anti-corruption program to keep the people happy, or perhaps allow more freedom and … introduce some form of election to make the people feel they have the right to choose.”
As for the economy, he said, “A slowdown seems inevitable in the next 5-10 years, (but) the real threat is that all the bubbles created during the last decade may burst, such as property. Imagine the damage done if property prices fall by 30-40%. “
Happy Ending Possible
However, others see the China Story continuing. Economic growth may not hit double digits again, but the low level of development of most of the country and the high rate of savings leave ample room for expansion.
It’s also useful to remember that market-oriented economic reform has a history of only 34 years in China: stocks markets are less than 25 years old. Further reforms, such as curbing the influence of giant state-run enterprises, will be tough, but if Xi and other new leaders can implement them the economy will benefit substantially.
Andy Mantel, founder and CEO of Pacific Sun Advisors, said the China Story will actually get more enticing. It now consists of some 6,500 Greater China stocks sold in exchanges around the world. “… (T)here are many to choose from, and investors can get access to practically all relevant sectors in the China growth story,” he told Equities in an email.
Those China-related stocks found from Taiwan to London are “grossly underinvested,” Mantel said. And in five years the number may swell to about 10,000.
“Five to 10 years ago there were minimal institutional investors in the U.S. invested in Chinese equities,” he said. “From my discussions with prospective investors now they remain underinvested. I would assume in 5-10 years there will much more participation as the total universe of stocks increase and investors realize that there are excellent investment opportunities overseas.” End
Tomorrow check out Barings’ fund manager William Fong’s take on the future of the China Story.
Hong Kong Blue Chips: +155, +0.7, to 22,100, 11-07-12, Hang Seng Index
Chinese Stocks in Hong Kong: +79, +0.7%, to 10,813, 11-07-12, HSCE Index
Shanghai Stocks: -0.3, -0.01% to 2,106, 11-07-12, Shanghai Composite Index.
Chinese Stocks in the U.S.: +3.2, 391.8, 11-06-12, Bank of New York Mellon, ADR Index-China – closed by storm
Insight: Hong Kong rebounded in heavier trading following gains on Wall Street. KGI Research
Quotable: “We expect the Hang Seng Index to reach 22,500 before the year-end with a strong technical support at 21,500.” Guoco Capital. 11-7-12
Chinese Company to Watch: “Since we have recommended a BUY on Glorious Property (0845, HK)on 17 October 2012, its share price increased 6.0% against a 3.5% rise for both the Hang Seng Index and the HSCEI. We reiterate our rating because we believe investors will continue to chase laggard given an improvement in fundamentals of China’s property developers.” Guoco Capital. 11-7-12
Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.
For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN