China\u2019s economy continues to barrel ahead, fuelled by growth in all key areas, including exports, domestic consumption and private investment. Growth is so hot that the government has taken measures to cool things down, and the pace of growth in 2011 could be about 8% vs the estimated 10% for 2010.
\u201cChina is like the U.S. at the end of the 19th century,\u201d says Markus Koebler, vice president of international equities with Natcan Investment Management Inc. <\/b>in Montreal and co-manager of the Altamira Asia Pacific Fund, sponsored by National Bank of Canada. \u201cIt is experiencing massive migration from rural areas to cities. When you change a farmer into an industrial worker, you increase productivity \u2014 and that ignites consumption.\u201d
Exports growth is surging again in China after a setback in 2009. China\u2019s exports in November were up by 35% from a year earlier. Exports account for about 35% of Chinese gross domestic product, but they are not the only stimulator of the economy. Domestic consumption, private investment and government spending are playing important roles, says Chuk Wong, manager of Dynamic Far East Value Fund, sponsored by Dynamic Mutual Funds Ltd. <\/b>of Toronto. Although China\u2019s government is expected to continue to allow the yuan to rise gradually, he adds, it won\u2019t let it rise enough to kill external demand for Chinese manufactured goods.
Authorities in China, which recently surpassed Japan as the world\u2019s second-largest economy, are becoming concerned about inflation, which has risen to a two-year high of 5.1% \u2014 well above the government\u2019s 3% target. Property-value bubbles are forming in some cities, particularly in large centres such as Beijing and Shanghai, and many fund managers are steering clear of real estate stocks, which they feel are vulnerable to a correction. China raised interest rates in December by 25 basis points, it\u2019s second move since the 2008 financial crisis, and it\u2019s possible more interest rate hikes are in store, which could negatively affect domestic consumption. In addition, the central bank has raised capital reserve requirements to stem the flow of money that\u2019s sloshing through the economy.
Robert Bao, manager of Fidelity AsiaStar Fund, sponsored by Fidelity Investments Canada ULC, <\/b> says the key risks to the Chinese economy are a double-dip recession in the U.S. and a European debt crisis, both of which could put a drag on Chinese exports. However, even if exports are sluggish, says Bao, who works in Hong Kong, China\u2019s government, which doesn\u2019t have debt problems, can keep economic growth in the desired 6%-8% range through various fiscal measures, which would prevent high unemployment and social unrest.
Heavy infrastructure spending<\/b>
Bao expects continued heavy spending on infrastructure. By 2012, China\u2019s high-speed railway network is expected to be larger than those in the rest of the world combined. Other priority areas are renewable energy, health care and technology.
Fund managers investing in China have a preference for holdings tied to infrastructure development or the rising tide of consumer spending rather than to exports, which could be vulnerable to economic troubles in other parts of the world. Some fund managers also are avoiding interest-sensitive stocks, such as Chinese banks.
Among the industrials, Wong favours China Liansu Group Holdings Ltd., the country\u2019s largest manufacturer of plastic pipes and fittings and a supplier to several industries. He also likes China High Precision Automation Group Ltd., which manufactures instrument and technology products for industrial plants.
William Fong, co-manager of Excel China Fund, sponsored by Excel Funds Management Inc. <\/b>of Mississauga, Ont., and senior investment manager with the Asian equities team for Hong Kong-based Baring Asset Management (Asia) Ltd., is among a handful of fund managers who like auto companies. The Excel fund holds shares in auto dealership and parts supplier Dongfeng Motor Group Co. Ltd., as well as Brilliance China Automotive Holdings Ltd., which produces the popular BMW cars in China.
Natcan\u2019s Koebler likes stocks that are geared toward consumer demand, such as Hengan International Group Co., a producer of hygienic paper products. He also likes Tingyi Holding Corp., which produces instant noodles and other packaged foods.
Mark Lin, vice president, international equities, with CIBC Global Asset Management Inc. <\/b>in Montreal and manager of CIBC Asia Pacific Fund, also favours consumer stocks. Recently returned from a visit to China, he says: \u201cIt\u2019s even busier than last year, and there\u2019s more evidence that people are buying luxury goods.\u201d Hengan is also among his picks. Another is Want Want China Holdings Ltd., a manufacturer of packaged foods and snacks. \tIE<\/b>
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