Long-term prospects for China look good

Since the 1960s, Hong Kong has been like a home to me. And in the frequent visits I made to China things have changed substantially, particularly from the days of the Cultural Revolution. I feel very excited to be a witness to this kind of dramatic change.

Tremendous growth

China has witnessed tremendous growth so far — for example, despite the global economic slowdown, according to the International Monetary Fund, the Chinese economy is expected to grow by eight per cent in 2009. With such strong economic growth coupled with money supply growth of around 20 per cent on an annualised basis, there is naturally the potential for bubbles to form in any kind of market, whether it is the property market or the stock market.

Indeed, the stock markets in China have risen substantially this year and are much more expensive than some other markets in the world, but I believe they are not exceedingly so. The government is quite aware of the possibility of overheating and has been watching the situation carefully.

From time to time, when the markets appear to be getting out of hand, the government takes certain measures to prevent a stock market bubble from forming, such as increasing the stamp duty or restricting capital going into the market.

The same thing is true of the property market. There may be some signs of overbuilding in certain areas, but the Chinese people's desire for homes or apartments and their desire to upgrade their living standards means that there is likely to be a continuing demand for good housing.

For example, up to now, real estate development has been concentrated in coastal cities such as Shanghai, Shenzhen and Guangdong, but now the activity is moving inland to cities like Chongqing.

Many of these inland cities need substantial infrastructure, including subways, roads, power stations, parks, and adequate housing. The building of this infrastructure is well underway as witnessed by numerous construction sites.

In terms of industrial production, many industries in China currently have excess capacity, and some of that capacity — approximately 10 per cent of total capacity — will probably count as wasted capital. This is particularly true in the construction, mining, machinery and automobile industries.

Nevertheless, I believe a number of companies in these sectors will continue to grow and stay profitable, and could even purchase other companies that have excess capacity. Meanwhile, I see the strongest growth in extractive industries such as oil exploration and production as well as in the consumer products area.

Recently, talk of the Chinese government looking to reduce credit availability to prevent overheating led to concerns that such policy tightening measures might have an impact on short-term growth prospects. I believe that while the Chinese government will be careful to prevent bubbles from forming, it probably would not want to reduce economic growth by restricting credit availability too extensively.

Dependence on US

Some investors may express concern that China's exports are significantly dependent on the US consumer, and that China may therefore be impacted by the economic slowdown in the US.

However, of China's total exports, the per cent going to the US has decreased substantially over the last decade and is now around 18 per cent, while their exports to other parts of the world are increasing as we speak. Europe is one big market for Chinese goods, but emerging markets are also rising in importance.

In addition, I believe the domestic consumer in China will increase in importance as exports decrease in importance, when it comes to contribution to total gross domestic product (GDP).

Long-term outlook

I continue to believe that the investment prospects and long-term outlook for China are excellent for a number of reasons.

(1) Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese; (2) that leadership has the organisational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world; (3) China has the financial resources to undertake this gargantuan task with the world's largest store of foreign reserves; (4) China has one of the healthiest banking systems in the world, where most individuals have little borrowings; and (5) inflation and interest rates in China remain relatively low, while investment in infrastructure continues to boom.

Meanwhile, China is also playing the role of a significant importer in the global market, particularly when it comes to natural resources and commodities. The buying of natural resources not only caters to growing internal demand in China, but also serves as a hedge against dollar depreciation. I believe that the Chinese will continue their policy of accumulating foreign exchange reserves but may do so at a slower pace than before.

The new credit facilities extended by the government over the past year will probably be used by households to improve their standard of living — poorer households are likely to spend it on disposable products and appliances, while wealthier households are likely to purchase cars, new apartments and houses, and education for their children.

But we must remember that the job of increasing disposable incomes is not over.

There is still a lot to be done in terms of raising the standard of living — particularly in the rural areas — and also confronting the new and different challenges that come with an industrialised society.

The writer is Executive Chairman, Templeton Asset Management Ltd.