China index hits hurdle in Olympic sprint

Dubai: The 'Lucky Olympics' are underway. In their 'no-stone-unturned' approach to the Beijing Olympics, the opening ceremony kicked off at 8.08pm (local) on 08/08/08 - in a country that believes in luck! How lucky is that? To many this is China's "coming out" party after being locked up in its own geography for years and given an extended isolationist sentence by Mao and his mates. This Olympics is symbolic of a new world order - one in which China takes centre stage. They have been threatening podium finishing in sports, in business and global power over the last 16 to 20 years. From this Olympics onwards - expect to see Chinese ambition rewarded on all these podiums.

Congratulations China or not? Let's look at the short-distance; medium-distance and long-distance prospects. Short-term prospects of hosting a fabulous games - "unknown unknown's" aside (like terrorists) - look good.

The girly-football matches were attracting 20,000 spectators per game even before the opening ceremony (so did they cheat on the 08-08 thing?). That's massive support.

Other numbers are impressive too: 160,000 at the opening ceremony; teams of 639 from China; arch-enemies US at 596; Russia 467; and 'wanna-be' big countries like Australia, Britain, Canada, Germany, etc with teams of over 300. A total of 37 venues have been built with 85 per cent of it being funded by corporates to the tune of 17.4 billion yuan ($2.1 billion).

Additionally, investments are expected from corporations seeking ownership rights after the Olympics. Furthermore, the country will benefit from sites being retained by the State General Administration of Sports for the training of future national sports teams and for events. The publicised statistics on these games therefore suggest a resounding gold for Beijing.

A couple of years ago we interviewed Aaron Betsky of the Marco Polo Fund, a Chinese equity fund. One of their sales points revolved around the historic boost Olympics had given local equity indices. If you had followed the Marco Polo Fund or the indices over the last few years you would have done well.

Predecessors

But then, so too did Beijing's predecessors. Bloomberg shows that in 1988 (Korea) the KOPSKI index rose 185 per cent in the two years before the games; in 1992 (Spain) the IBEX35 grew 33 per cent over the same period; in 1996 (USA) the S&P grew by 45 per cent; in 2000 (Australia) the AS30 rose by 19 per cent, and in 2004 (Greece) the GSE grew by 32 per cent. All Olympic hosts appear to be winners.

So now to China 2008. The Shanghai 'A' share Index, for the two years to June 30, 2008, has shown a racy 67.4 per cent total return.

However, if we break down the years: In Year One to June 30, 2007, we see a massive drive towards a 130.8 per cent gain. Indeed, if you had started at the beginning and not at the Year One mark, the return was nearer to 225 per cent.

Yet Year Two to June 30, 2008, we see a decline of 27.5 per cent with the drop from the peak being some 56 per cent. Hardly a race to be enjoyed unless it is a small holding befitting that of an emerging market portion of a diversified portfolio.

Bottomline - the Shanghai and Chinese indices generally have hit something of a hurdle in recent months.

What of the mid-distance issues? Are the recent stumbles a harbinger of a fall? Not necessarily. With most major markets off some 20 per cent since peaks around October-November 2007, the mood now turns more towards inflation control and the macro outlook for China is a lower consumer price index (CPI) and a slight deceleration in gross domestic product (GDP). Moreover, the World Bank has recently raised China's GDP forecast to 9.8 per cent.

Policies

Marco Polo experts state, in their June Monthly Insights publication, that "there is now significant speculation that China may begin to finally shift away from the tightening policies it pursued since 2007 and may begin to focus instead on continued economic growth rather than fighting inflation.

With inflation having come off from recent highs and worries about the impact of a US-led global slowdown, Beijing may well be more concerned about flagging growth rather than surging prices".

They go on to say that they "think the Chinese government should risk CPI acceleration in order to gradually implement the reform of resource prices [i.e. the ending of government controls of certain commodity and energy prices]," and further they state that, "fiscally, we would like to see further subsidies to agriculture and continued government expenditures on infrastructure and the social security system, particularly the health care system".

Medium term then, the short-term stumble should not take them out of the medium-term race. The Peleton seems to be stumbling as well.

It means that medium-term prospects from a more-gloomy-than-normal position remains fav-ourable with the biggest reason for investors taking an interest in China being its inevitably positive long term prospects. This country of over one billion people is now, clearly, "out of the closet".

This Olympics might see its rise up the medal table (fourth in 2000; second in 2004) translated into an overall golden first place finish at this games. It might take slightly longer to achieve the same status in the business world, but, ironically, as Mao said, "The longest march begins with the first steps". Those first steps have been taken.

The writer is Chairman of Mondial Financial Partners.

See also Pages 49-57