Deregulation helps China's economy
By David McConnell, director of marketing at Atlantis Investment Management China's economy cont...
By David McConnell, director of marketing at Atlantis Investment Management
China's economy continues to register strong economic growth, due partly to the increased pace of deregulation.
This has lead to the rapid growth of the private sector, which aims to use the equity market to finance part of the expansion. We view this sector of the market as one of the economy's key drivers.
At the same time, there are major regulatory changes in the pipeline affecting the equity market. In order to invigorate the market, mainland authorities have recently initiated the Qualified Domestic Investment Institution quota, which would allow mainland institutions to buy foreign exchange to invest, in a structured way, in the Hong Kong market. This should lead to a re-rating of the H-share market.
The potential launch of China Depositary Receipts (CDRs), which should allow mainly red-chip companies to dual list in the mainland so they can raise fresh capital, is another attractive feature.
Having undergone serious structural reforms, particularly in the state-owned enterprises (SOEs) and, progressively, in its banking system, China has been transforming the nature of its economy from the boom-bust of the early 1990s to a more managed and steady growth pattern.
The economic growth drivers have also shifted from a reliance on exports and investments to an emphasis on domestic consumption and foreign direct investment. This mix should boost China's steady economic growth as exports have already proved to be too fickle as they hinge on external economic strength.
With banking reform now at the top of the agenda and, despite the pain involved in this structural reform, we believe the quality of China's economic growth is set to improve and outweigh the headline growth numbers in the near term.
We think this is starting to reflect in investors' focus: this being a positive change, investors are looking beyond the question of growth sustainability and are concentrating on the strength of domestic demand instead.
Currently, primary and secondary industries make up 66% of China's GDP, with the tertiary industry accounting for the remaining 34%. The under-representation of the tertiary industry in the mix indicates that China is still a developing economy, compared with, say, the real domestic economy of Japan, which has a mix of 31% and 69% for primary/secondary and tertiary.
Undoubtedly, China still has a long way to go, but the current mix already reflects a significant improvement over the last de- cade, with the speedy migration from primary to secondary.
This current mix also dominates the current market capitalisation of listed corporate China where industrials dominate with a 63% share of the total. This is why we believe that in China's pursuit to move up the value chain of the industrial evolution, most of the listed universe would continue to be overshadowed by primary/secondary industries for some time.
As China develops into a real and sizeable domestic economy, and should market cap follow the same pattern of market composition, we expect to see more tertiary businesses listing, resulting in a wider range of investment alternatives.
Bull points
Strong economic growth in China.
Re-rating of the H-share market.
Transformation of the economy.
Bear points
Export markets can be fickle.
Reforms will inevitably cause pain.
Some relics will take time to die.
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