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Kevin Gin: The China Bull Run To Continue?
Aspire, Thought Leaders | 04 May 2015
By: Kevin Gin, CFA
Articles (5) Profile

Once again, China has caught the imagination of the world, with China’s capital markets, as represented by the CSI 300 Index (an index replicating the performance of 300 stocks traded on Shanghai and Shenzhen stock markets) increasing by 127 percent in the last 12 months.

Whilst economic growth is expected to slow down to seven percent in 2015 and will settle at a new normal, China’s economic growth remains high relative to other countries.  Furthermore, recent policy shifts such as lowering requirement reserve ratios, the Shanghai-Hong Kong connect etc, has brought back confidence amongst investors.  The question is whether China’s economic performance can continue?

There is no doubt nor is there any contention that China’s economic performance has been unprecedented and has even surprised many critics around the world. China’s five-year Compound Annual Growth Rate (CAGR) from 2010 to 2014 was 8.5 percent.  But averages do not tell the whole story and neither can digits.

 

The reality is that China is a complex country and society. Its cultures and norms span across generations if not thousands of years.  Whilst there is some consistency across time and between provinces, the fact remains that China consists of 33 regions (22 provinces, five autonomous regions, four municipalities and two Special Administrative Region (SARs)) united by a common culture, language and love for their country.

It is this diversity that provides the basis of sustainable economic growth, which is also one of the manifestos of the Chinese Communist Party.

There are many investment themes and sub-themes being thrown up by and at investors.  Some of these themes include but are not limited to urbanisation, consumerism, the anti-corruption drive, infrastructural development, State Owned Enterprises (SOE) reforms, health care reforms, education reforms etc.

 

However, for these themes to be sustainable, China must have in place the right structure, policies and people. But equally if not more important, but seldom discussed, is stability. Stability within the government and society is crucial for sustainable economic growth and prosperity and these form the path towards understanding China and its enormous growth potential and opportunities.

Each year, China produces more than seven million graduates, up from less than a million in 1999, and two and a half times of the United States’s. Coupled with the State Council, China’s cabinet, issued a call for ministries and local governments at “all levels” to support innovation and startups, with fast-growing companies like e-commerce giant Alibaba as the nation’s new economic and job creation driver, leads a tech industry charge.

 

The stage is set for a new engine of economic development and further reinforces China’s tectonic shift from an economy that is largely secondary in nature to one that will be tertiary driven.

China’s Future

China is now at an inflexion point, as it goes through reforms and changes in the building blocks of future growth. Investing in China requires us to understand the policies of the central government.

At times there will be little clarity in details, or may more often than not lag behind policy statements. But it is certain that the “China dream”, involves the idea of “One World, One Dream”.

Some of the recent policy initiatives include: relaxation of the one child policy, development of the Asian Infrastructure Investment Bank (“AIIB”), New Development Bank (“NDB”), introduction of more Free Trade Zones (the pilot in Shanghai, followed on with Guangdong, Tianjin and Fujian province), China’s “New Silk Road” vision etc.

These are all strategic initiatives which form the basis of China’s future growth. There is no doubt that China will play an increasingly more important role in world affairs from an economic, political, military and social standpoint. In the mindset of many, China is already the number one economy in the world. However, the best has yet to come!

Kevin Gin will be speaking at the upcoming Shares Investment’s MYR 2015. Click here to find out more!

Kevin Gin, CFA focuses on valuation anomalies across certain industries and geographies. Kevin brings with him more than 25 years of investment experience.

Please click here for more information about this author.


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