Smaller Chinese provinces could provide strongest long term growth for investors in China, according to fund managers

News - Funds

Written by Ray Clancy

Monday, 09 August 2010 07:51

Investors should look beyond the big cities for future drivers of growth in China as those in smaller provinces could see strong growth, it is claimed.

Fidelity UK equity fund managers Tom Ewing and Aruna Karunathilake, who recently visited China for three weeks on a research trip, agree that the consumer is the most attractive area of the economy for the next decade. They believe the best way to understand this is to look beyond the major cities of Beijing and Shanghai.

‘People have to stop looking at China as China and start looking at it as a collection of massive provinces and the investment opportunities in each province may be differentiated.
For example drivers of growth, wealth and investment in Hefei, which is the capital of Anhui province, are very different to those prevalent in Guangdong where it relies on exports, coal and heavy industrials,’ said Ewing.

‘As China moves from an export led economy to a consumption led model the Anhui province is well placed to benefit. Manufacturing needs to be close to roads, high speed railways and the Yangtze, the arteries that connect the new China, and Anhui has these links or at least projects in place to develop them. It is also attractive in that it has cheap labour and investment is already coming into the province by the bucket load. All this infrastructure build will be great for future GDP growth,’ he added.

According to Karunathilake, believes that while broad themes for growth in China are now well understood by investors, it is only by looking outside Beijing that emerging trends can be discovered. ‘Manufacturing has been built on labour in coastal cities and near the ports but this is starting to change,’ he said.

‘As infrastructure improves, goods can be transported from inland factories to the ports. Migrant workers are agitating for more rights and as wages rise, it is cheaper for companies to move inland. Also, the coming generation of workers have grown up with internet and are aware of life beyond 75 hours a week in a factory. They may not want to leave their home to become a migrant worker, so the factories are now coming to them,’ he added.

As these changes occur, it is having a positive impact on individuals. ‘Wages are starting to rise and this is absolutely critical. Since China joined the World Trade Organization in 2001, it has very much been an export led economy. This has resulted in a massive creation of wealth which has mostly been enjoyed by State owned enterprises and companies in the export sector,’ explained Ewing.

‘This can lead to some dissatisfaction and the Government will not want to let social inequality to get out of hand. We are at a tipping point. We are likely to see a period over a number of years where wealth is taken out of the hands of manufacturers and exporters and into the hands of the consumer’ he added.

Karunathilake says, as a UK equity manager, he is able to gain good exposure to these themes in China by investing in UK listed companies. ‘The FTSE is profoundly international with 70% of revenue derived from outside the UK. Those companies that are going to prosper in the West are likely to be those who can sell to the Chinese and other Asian nations,’ he explained.

‘I would encourage people to think of China as a very long term trend. The Government is starting to actively encourage consumption as it realises that relying on the over leveraged OECD consumer as the hub of its export led economic policy may not be the best long term approach. The long-term story is awesome and consumer will be the most attractive area of the economy for the next 10 years,’ he concluded.