External Drivers - Watching China in 2011

In my postings on the topic of "The Property Bubble and Investment Trap" series, I often mentioned to watch the external drivers, particularly relating to the economy of China.

I like this article which was published by TODAY in mid December 2010. It highlighted 7 issues which are also key topics I have been scanning and following for sometime on the external business environment in China - prior to, during and after my recent retreat in Nanjing.

In the new year, I will be posting articles on these topics vis-a-vis the contrasting context in Singapore, just as some of these issues get more heated up in an Election Year. I hope you will find them interesting.

The following are some comments in personal emails to me. If you like this Blog like these other visitors, please forward the link of This BLOG to those who may like it. [Link : http://de-leviathan.blogspot.com/ ]

"I have been religously following your blog for months and I find the your articles on property very enriching, well analysed & logical...

It is very enlightening & it is especially beneficial to working class Singaporeans. It will definitely help ordinary people like me to understand the property market and hopefully to benefit from it."

"I'd stumbled upon your blog last night and just wanted to say thanks for providing a logical, well-argued counterpoint to the rah-rah sentiment of the current property market."

"I've been trying to follow your blog including your past entries for less than a week now and they have been really enlightening and useful for a first time property buyer like myself. Thank you for your posts. I'll be looking forward to your next post comparing BTOs, DBSS and ECs."

"I came across your comment in Lucky Tan's blog recently. I find your comments insightful."

"Just happen to browse your blog and found it very enlightening."

HAVE A COLOURFUL AND ABUNDANT NEW YEAR

Reference # 1

TODAY Dec 16, 2010
China in 2011

by Laura Luo

Seven issues no investor should ignore

As we move towards the end of the year in which China became the world's second-largest economy, we answer the seven key questions that investors are asking about China, its markets and the outlook next year.

INFLATION

The Chinese government is widely expected to raise interest rates further in an effort to curb inflation. Following the recent higher-than-expected increase in consumer prices, there is now a greater risk of rate rises in the near future. In the short term, this will hurt sentiment and flows into the market.

However, from a longer-term point of view, this scenario provides investors with an opportunity to enter the market, given that inflation is likely to ease into 2011. While policy tightening will temper growth and challenge some of the marginal players in the market in the short term, it will allow for more manageable growth going forward, opening up some interesting opportunities for long-term investors.

THE PROPERTY BUBBLE

The Chinese property market is in a bubble in the tier-one cities, particularly at the luxury end. The bubble is spreading to second-tier cities and, like all bubbles, a collapse in the market would be a serious risk to the confidence and the economy. The challenge for the government is to orchestrate a soft landing given how important housing-sector growth is to the economy.

DOMESTIC CONSUMPTION

Recent government policy points to an increasing emphasis on the domestic economy, with a view to bolstering its contribution to China's overall economic growth. The drive is not new and has been in the works for some time. This is a trend that will develop over the next 10 to 20 years as the economy shifts away from fixed-asset investment and export-driven growth. While the policy is positive for growth in the consumer-related areas of the market, we would warn against blindly investing in consumer names. Many may not deliver particularly impressive returns, given the high valuations at which these companies are currently trading.

COMMODITIES SUPERCYCLE

According to some forecasts, growth in China's domestic economy and increased consumption will eventually trigger a rise of global inflation and a commodities supercycle. The commodity supercycle is something that all investors should be prepared for. There will be increasing pressure on commodities in the coming years from both China and India because of their continued urbanisation and rising consumerism.

'A' SHARES vs 'H' SHARES?

At present, we like the domestic "A" share market (shares of companies that have been incorporated in the mainland of China traded on the Shanghai and Shenzhen stock exchanges in yuan) more than the "H" share market (mainland-incorporated companies traded on the Hong Kong Stock Exchange). We see China "A" shares trading at a relative discount to their long-term levels as well as being market laggards. Markets will continue to adjust to policy (as they react to inflation and the threat of further monetary tightening), but we expect this phase to pass and inflation pressures to ease in the first quarter of 2011. We do not expect to see a consolidation of the two markets for some time.

CURRENCY WARS

We do not expect the government to allow a large, one-off rise in the renminbi but it will, however, need to allow the currency to appreciate at a measured pace of between 3 and 4 per cent per annum. Obviously, this will be a positive for domestic names with overseas expenses and domestic revenues (i.e. airlines), while exporters (who have higher renminbi costs and revenues priced in US dollars) will be negatively impacted. From an investment point of view, we continue to be wary of exporters.

…. AND FINALLY

The main reason behind China's underperformance among global markets in 2010 has largely been the uncertainty surrounding monetary and fiscal policy and continued anti-inflation measures. The government's policy has been primarily directed at the housing sector. Going forward, we see continued risk on the housing front, although we expect the outcome to be a soft landing.

The writer is a fund manager in Chinese equities at Schroder Investment Management.