July 2007

NEWS ANALYSIS: Beyond our borders

There may be some European financial institutions looking beyond China in the Asian market, such as India and Korea, but it’s not hard to find managers still singing China’s praises. “When you look at China’s economic picture there’s no place like it compared to the rest of the world. It currently has the biggest US dollar reserves with which it could pay off its debt if it wanted to,” says Leonard Aquarone, UK relationship manager for Callander Managers. Like a lot of other investors, Callander favours the Chinese consumer market, and it’s easy to see why as China’s rising middle class continues to look for places to invest its hard earned cash. “Around three to four years ago there were no credit cards or savings and people were keeping money under the mattress literally. But now the housing market is growing and income has increased. Our fund is 100% linked to domestic consumption related stocks. By investing in China directly there are no problems in links between China and the US,” says Aquarone. Whatever critics may say about China, it’s growth story continues further. Its real GDP in the first quarter of 2007 was 11.1% higher than a year earlier. This beats the growth rate from the average rate of 10.1% seen in previous years. There are few signs that China’s growth is slowing. At the rate that China is going, its rapid pace of industrialisation is likely to replicate the growth seen in Japan from the 1950s to the 1970s. In that period, Japan grew at an annual average rate of 9.4% per annum in real terms. As China is a more populous economy than Japan and migration from rural and urban areas can be expected still for years to come, Invesco predicts China to experience growth rates between 8-9% per year on a multi-year basis. The major downside to China is of course the fact that a joint venture vehicle is the only way into the Chinese market. Current Chinese regulations stipulate that foreign firms can own a maximum of 49% of a Chinese asset management company. But the situation has improved over the years – in 2004 a stake of only 33% was allowed. In spite of these restrictions foreign invested funds have gained a rapid foothold in China, with market share reaching 39% in an industry with some RMB856bn (e90m) in assets under management in 2006, according to a report conducted by KPMG and Reuters this year. However, domestic players, who have the advantage of local knowledge, are still beating external managers in performance and assets under management. As of December 2006, seven of the eight largest fund mangers were domestic players according to KPMG. With such stiff domestic competition and restrictive regulation, it’s surely questionable whether China will remain the darling region in Asia for long. © fe July 2007

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