Is the dragon a crouching tiger?

By ANDREW OXLADE, COLUMNIST
Updated:

 

CHINA, by far the most populous country on earth, will finally join the World Trade Organisation this weekend after 15 years of trying. Pundits pushing the 'China story' say membership will lead to a massive influx of investment - great news for Chinese stock markets and their investors.

China's economy is tipped to become the world's largest within 25 years, leap-frogging the US, Japan, Germany, Britain and France. And its population of 1.3bn is expected to have greater spending power than any other country within just 10 years.

And to top it all, China recently clinched the right to host the 2008 Olympic Games, prized as a multi-billion pound money-spinner.

Michael Watt, manager of the Henderson TR Pacific Investment Trust, says: 'There's been a genuine change in China. While other countries in the area are falling into recession, China remains robust because of its consumer growth.'

The potential of this consumer growth rings true with mobile phones. Around 70% of adults in the UK own a mobile phone. Henderson's Watt estimates that in China, already the biggest mobile phone market in the world, only 10% of people are connected. As that figure rises, companies like China Mobile will boom.

The miracle growth of China's neighbours also helps explain why all eyes are on China. The likes of Singapore, Taiwan, Thailand and South Korea have been labelled tiger economies due to their fierce growth since the Sixties as they embraced new technologies. South Korea, for example, has gone from Third World laggard to the world's 12th largest economy in just three decades.

As strict Communist rules have been relaxed over the past decade, observers say the same is happening to China. And admission to the WTO raises hopes that the dragon's transformation from crouching tiger will come even sooner.

China's appeal has increased in recent months because of its insulation from the world slowdown. The country sells most of its wares to its own vast population whereas most countries in the Far East are big exporters to the US, which is on the brink of recession.

China's economy is predicted to grow 7% this year and 7% next year compared with an estimated average of 1% and 1.2% for the developed world. Even when the UK was booming in the late Nineties, growth failed to rise above 4%. Other short-term factors come into play, but over the long-term economic growth added to inflation should equal stock market performance.

So surely investors would be mad to miss out on such a boom? Financial advisers agree to a point but warn investors to beware of the dragon.

Anna Bowes of Bath-based adviser Chase de Vere says: 'We've heard a lot of good things about China but it is a very unstable market.'

Jason Hollands of London-based adviser Bestinvest says reasons for investing in China in the long-term are 'extremely compelling' but he also highlights the dangers.

'There is the potential for political instability, particularly if the situation with Taiwan ignites,' he says. China refuses to recognise Taiwan's independence. If a war broke out between the two, the region would be thrown into turmoil and stock markets would tumble.

Critics also argue that deep-rooted corruption in China may hamper the country's economic development.

Advisers say investments in China should make up no more than 5% of a balanced portfolio because of the risks. It is also worth remembering the Chinese stock market is closed to foreign investors. Fund managers get around this by investing in Chinese countries listed on the Hong Kong stock exchange. The downside is that a falling Hong Kong market will pull down the Chinese stocks.

Very few funds invest purely in China. JPMF China Dragon unit trust comes close. It is 75% invested in China and Taiwan, with the rest invested in companies that have vested interests in China. It charges 1.5% a year and 5.5% upfront and remains a favourite of Chase de Vere after annual average growth of 17% over the past three years.

Bestinvest suggests picking a general Far East fund, most of which have spotted the benefits of China and are heavily invested anyway. For instance, the Henderson TR Pacific Investment Trust has 18% of assets in China compared with the industry benchmark of 9%.

Bestinvest recommends the Fidelity South-East Asia fund, with initial charges of 5.25% and annual fees of 1.5%, or the cheaper First State Asia Pacific fund with upfront charges of 4% followed by 1.4% a year. The First State fund has returned an annual average of 21% over the past three years.

The Henderson TR Pacific fund is the cheapest charging just 0.9% a year.

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