Sunday, March 24, 2013

China: The Emerging Superpower?

AfrAsia Bank is pleased to post the following from Louis Lallia. Louis is International Development Manager at AXYS Group (Mauritius) and outlines in the interview below China's growth story and its attractive area for investment.

Why do you believe China is an attractive area for investment?

Whilst Europe is fighting to avoid economic decline, China is posting GDP growth rates close to 8%. Even Thailand, the new Asian Eldorado, posted rates below this (6.4% in 2012). It is true that these figures are not as impressive as the double digit growth figures experienced in the 2000’s but I believe that’s the sign of a maturing economy. To quote Jim O’Neill (Chairman of Goldman Sachs Asset Management and the man behind the BRIC acronym) “China is going from a period where it was all about the quantity of growth into an era where the focus is on the quality of growth”.

The emergence of a Chinese middle class is the essential component of this phenomenon. Experts predict that over 340 million Chinese will enjoy an annual income ranging from USD 12,000-25,000 by 2016 meaning that the country is changing from an investment-driven economy to a more mature consumer-driven one. 

China’s GDP is expected to grow by 50% by 2017. China is also cheap at the moment. The Hang Seng China Enterprises Index is close to valuations that could only be found back in 2001. And that – coupled with its persisting growth – is what we find really exciting. It is not very often that one has the opportunity to buy at such an attractive price. Chinese companies have been posting healthy results and yet the stock market has failed to properly translate this. 

How does the Hang Seng China Enterprises Index reflect the Chinese growth story?

Well at the moment it doesn’t – and that is exactly why we think it represents such a good buy opportunity: we believe that it should be much higher.

The Hang Seng China Enterprises Index is the main Index tracking the top 40 mainland Chinese companies. Think of the Sem7 for Mauritian Stock Exchange. It is listed on the Hong Kong Stock Exchange (because foreign capital ownership is restricted in China) and accounting rules are in line with IFRS guidelines – an essential element for international investors.

How can one invest in China?

For an investor who knows the Chinese market, I would advise them to invest directly. However, stock picking is both difficult and time consuming and private investors often do not have sufficient resources to carry out in-depth due diligence.

One could also decide to invest by tracking the Hang Seng Index. There are a number of ETF (Exchange Traded Funds) that do just that and can be bought both in USD and in €. 

Like direct ownerships in stocks though, ETF’s do not offer any protection to the investor. It is for that reason that we decided to invest in China through a structured note that offers our clients 100% capital protection whilst enjoying an attractive participation in the rise of the HSCE Index.

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