Now is the time to invest in China stocks
China's economy late last year was more stable and successfully avoided a "hard landing", in which an economy rapidly shifts from growth to slow growth, because the government relaxed its monetary policy by lowering cash reserves of commercial banks to 20 per cent and cutting the lending rate to 6 per cent.
Meanwhile, growth of gross domestic product continues to be high, although it slowed down to 7.4 per cent in the third quarter of last year. Emerging are signs of economic recovery, especially in manufacturing, as manifested by the Purchasing Manager's Index for its non-manufacturing sector, which surged for the third straight month.
China's value-added industrial output rose 10.1 per cent year on year in November, up from 9.6 per cent in October and 9.2 per cent in September. Retail sales increased by 14.9 per cent and loan growth was more than 15 per cent, which is still high, and inflation remained low at 2 per cent in November.
All these factors illustrate that China's economy is improving. Also, the Asian Development Bank recently predicted that China's GDP would expand by 7.7 per cent in 2012 and 8.1 per cent in 2013. However, the economic risk for 2013 is the growth of exports in view of the sovereign debt crisis in the euro zone and the economic slowdown in the United States.
China's political transition is not expected to affect policy continuity because it has a long-term, five-year political plan. Xi Jinping, the incoming president, has stated that China is ready to launch its economic stimulus policy.
The government will also focus on exports by implementing an economic-reform policy that will be formally announced in the second half of this year. This policy will cover foreign-exchange systems, industrial productivity systems, urban development and basic life insurance. Not only will it be implemented by the central government, but it will also be decentralised to local governments.
Investment risks in China are expected to decline because economic growth has started its recovery, inflation remains low and the leadership transition is smooth. In fact, 2013 is the best opportunity for investment in China, since its economy is estimated to have already bottomed out.
Meanwhile, foreign fund flows, especially from the US and Europe, continue to course into the Asian market. Besides, the US Federal Reserve System has beefed up its third round of quantitative easing to US$85 billion (Bt2.6 trillion) per month by adding $45 billion in Treasury bill purchases to $40 billion in mortgage-backed-securities subscriptions.
Consequently, global liquidity will remain high, which will benefit the Chinese stock markets.
H-shares - shares of companies incorporated on the Chinese mainland that are listed on the Hong Kong Stock Exchange or foreign exchanges - in the Hang Seng China Enterprise Index command a price-to-earnings ratio of 9.3 times, lower than the average P/E ratio of the past five years of 13.2.
Besides, economic recovery and economic reform in mainland China are expected to drive the P/E of the Hong Kong Stock Exchange upwards over the next 12 months.
In short, this is good timing for investment in Chinese stock markets.
Four industries in China are likely to grow this year, and the following investments are recommended:
l Commercial banking, which will benefit from credit growth and economic activity;
l Insurance, which will benefit from compulsory welfare enhancement, broader investment opportunities and an increase in insurance demand from expanded urban areas;
l Telecommunications, which will benefit from economic growth and expansion of new technology, such as the application of third-generation cellular service, smart phones and the Internet;
l Retailing, which will benefit from economic recovery, urbanisation and an increase in retail sales.
For those with little time to study but a wish to invest in Chinese stocks, there are mutual funds with a policy to invest in Chinese stocks, especially trigger funds with target returns within a given time frame. That way, the opportunity to get a higher return will be increased with the expansion of the Chinese economy and Asia.
Investment contains risk. Fund prospectuses should be carefully studied before making an investment decision.
This article was contributed by Asset Plus Fund Management.