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[loganair] 16/5/2015 09:23

Is China a Fire-Breathing Dragon or a Dragon on Fire?

Over the last several weeks, I’ve been telling you about “Disruptors,” the economic catalysts that are serving as agents of change in every geographic market, business sector and asset class you can think of.

These Disruptors create winners in some situations, and dislocations in others. And every change brings with it identifiable profit plays.

And if there’s one Disruptor story that has dominated the headlines – and the global financial markets – over the past two decades… it’s China.

With its low wages and economic emergence, China disrupted the manufacturing markets for technology products, the pricing for rare earths, and shifts in demand for energy, food and capital.

The upshot: China, the Disruptor, became China, the wealth creator.

If this talk of wealth seems out of place after I’ve spent the last several weeks talking about making money when markets go down, think again…

Nothing, you see, goes up forever.

Not even China.

Sure, China’s economic growth has been astronomical, and the Shanghai Stock Exchange Composite Index has skyrocketed.

But the laws of gravity haven’t been repealed.

China’s gross-domestic-product (GDP) growth has already cooled off, and stocks took an 8% hit early last week.

While this may not be the beginning of the end for the Chinese economic miracle – and its pumped-up stock market – it could be.

Then again, a lot of analysts and famous short-selling hedge-fund honchos have been calling for a hard landing in China, which hasn’t happened. Still, that doesn’t mean they’re wrong. It just might mean their timing is off.

Here’s what’s scary about what’s going on in China…
The “Fast” Slowdown

China just posted first-quarter GDP growth of 7%. While that’s super-strong by anybody else’s standard, it’s a marked slowdown for China.

For all of 2015, China’s been telling the world its economy will grow at 7%. With three fiscal quarters to go – and 7% the slowest growth since 2009, and the lowest projection for GDP growth in 25 years – there’s a good chance the rest of the year will see more of a slowdown than economists have been predicting.

Meanwhile, as the economy’s been slowing, the SSE Composite has been soaring.

At its recent high of 4,572, that benchmark index is up an astounding 130% in just a year. Since the beginning of 2015, stocks are up 41%. That’s in the face of a slowing economy.

Stocks are being propelled higher by the same “front-running” that occurred in the United States and Europe when speculators flooded into markets ahead of central-bank stimulus moves. Those moves hosed financial assets with catalyzing cheap money, causing a rush higher.

China’s central planners and its central bank, the People’s Bank of China (PBOC), have been making rule changes and cutting bank-reserve requirements and lowering interest rates – to spur lending and ease tight conditions in the slowing economy.

Desperate times, you see, require desperate measures.

While things don’t appear desperate on the surface, the story bubbling under is different – thanks to a mountain of expensive debt that is humbling the borrow-at-any-cost country’s growth model.

Consulting firm McKinsey & Co. estimates the cumulative debt of China’s government, corporations and households in mid-2014 hit $28 trillion. According to analysts at Standard Chartered Bank, financial credit surged to 251% of GDP in mid-2014, up from 147% at the end of 2008.

Local government spending to meet Beijing’s demanding growth rate targets saddled municipal borrowers with more than $3.64 trillion in debt.

As the economy slows, exports taper, construction grinds down and property prices keep falling, the worry is that China will see “rolling defaults.”

The PBOC has been doing its part to spur lending by lowering interest rates and reducing reserve requirements.

While those central-bank moves are to be expected, they’re not enough, according to central planners. In what looks like a desperate move to flood banks with more money to lend to stressed borrowers, securitization rules have been ripped open.

Just recently, the PBOC – with a nod from central planners – announced that regulatory approval of securitization issues of asset-backed securities was no longer required. Now issuers only have to register their deals.

Holy financial crisis redux!

Ostensibly, the idea here is to let banks – which currently hold $28 trillion in “assets” (assets are loans) – package them into asset-backed securities (ABS), which will mean they’ll be “structured230; Wall Street speak for leveraged, traunched and chock-full of trouble. Those structured securities will be sold to investors – which, I promise you, will include all the same banks selling loans, to get whole loans off bank balance sheets, selling them for cash to spur lending… to already indebted debtors.

It’s like déjà vu all over again. Only this time it’s China playing the “derivatives of mass destruction” game.

Why will exploding ABS issuance be a problem? How about the lack of regulatory oversight? How about the fact that banks will want to offload bad loans and bury them in structured products? How about the inside-the-ropes, bare-knuckle truth that it was originally a Basel I rule change that lowered the reserve requirements global banks had to maintain against mortgage-backed securities?

That led banks to package all their whole-loan mortgages – and hold them as securities rather than whole loans – which allowed them to massively leverage themselves up with riskier securitized loans believing they could sell them in a market rout.

We know how well that worked.

China is blowing itself into its own bubble. The problem is that it’s eventual bursting is that the contagion will be global and the fallout nuclear.

Will this Disruptor hit soon? It’s possible, but not probable. There’s lots of pumping about to start happening. Watching ABS issuance rates will be a good measure of the pace of leverage building in the system.

It could take years to blow.

Remember Alan Greenspan’s comment in December 1996 that the markets were exhibiting “irrational exuberance”? That bubble inflated another four years before causing the tech-wreck.

Remember Citigroup CEO Chuck Prince’s July 2007 comment to the Financial Times: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

It took another 15 months before that bubble almost imploded the global financial system.

Timing is always tough when ascertaining a bubble’s expansion. We’re not there yet.

So we’ll keep on dancing.

[loganair] 02/5/2015 13:20

CHINA is currently enjoying the somewhat dubious fruits of one of the all-time great stock manias, writes Sean Corrigan.

The CSI300 composite of Shanghai and Shenzhen equities has double since last July, with seven-eighths of those gains coming in the last six months and almost a third of them in the past six weeks.

Alongside the rise in prices, volumes are up by a factor of 2.7 from the same time last year while margin debt has exploded to more than Y1.6 trillion ($260 billion) in a classic instance of a credit-collateral tornado of Giffen goods (ones for which demand paradoxically increases, not decreases, as they become more expensive).

In fact, it has been reckoned that, at the going financing rate of 8.35%, this means that interest paid to brokers constitutes one of largest, single-sector generators of such income in the entire economy!

While all this has been going on, broad P/E ratios have risen from last May's 9.8 single-digit rating to the present 20.5 for the Shanghai A-Share and from an already more lofty 24.3 to today's 49.7 for the Shenzhen equivalent.

it is not just Chinese stock markets that are being driven beyond the bounds of sanity by wild-eyed policy measures. Nor will it be just the Chinese who will eventually have to pay the price of such folly but, at the moment, it does appear as if they may be suffering from a more virulent strain of the pandemic that is afflicting the rest of the world too.

So, possibly, it will be in their country first that, in Cantillon's words, "this furtive abundance [of fictitious and imaginary money] vanishes at the first gust of discredit and [so] precipitates disorder."

[loganair] 02/5/2015 13:09

China's "Slow" Growth Is Still Creating Huge Money Opportunities - By Michael Robinson:


If all you've been hearing regarding China recently is noise about its economic slowdown, you need to find a better news source.

Investors need to stop worrying over China's long-expected gradual slowdown. Do so and you likely will see, as my guest today does, the long-term growth ahead for key tech sectors in the world's most populous nation.

I'm talking about the kind of growth that will fill investors' portfolios with soaring profits for years to come.

Back from China:

That's one takeaway I gleaned from an in-depth conversation I just wrapped up with one of the tech investing world's leading China experts. And he has plenty more evidence to debunk the "Chinese slowdown" story.

In other words, Kevin Carter is helping us "Separate the signals from the noise" – Rule No. 2 of Strategic Tech Investor's "Your Tech Wealth Blueprint."

He just returned from a trip to China, so now is the perfect time to hear what else he has to say…

My guest today, Kevin Carter, runs the Emerging Markets Internet & Ecommerce ETF. On his most recent overseas trip, he spent his time checking up on the health of China's tech industry and economy.

Carter's fund concentrates on Chinese tech leaders like STI's "Million Dollar Tech Portfolio" holding Alibaba Group and Baidu, the so-called "Google of China."

Today, I want to share his thoughts on the profit potential that lies ahead for Chinese tech firms. The following is an edited transcript of our wide-ranging conversation.

Michael Robinson: Having just returned from China, can you give us your ground-level assessment of economic conditions there?

Kevin Carter: I'm just back from 10 days in four cities in China – Shanghai, Nanjing, Yangshuo, and Beijing – and I'd have to say, quite strongly, I saw no signs of China "slowing down." Domestic leisure travel, or tourism, is a prime example of consumption and China's move toward a service economy.

One of the main things I observed was that all of the places I visited were more crowded than I had ever seen them. And, importantly, the crowds seem to be coming increasingly from second- and third-tier cities. Their increasing presence is an indicator that domestic tourism continues to grow rapidly.

Another observation is the spread of the smartphone. As I awaited my delayed flight from Yangshuo to Beijing, I noticed that nearly everyone waiting with me was on a smartphone. From my count, at least 70% of the people were on their smartphones.

I also experienced firsthand how app-based business models, like Airbnb and Lyft, are spreading in China just as they are here in the United States.

I was the first person waiting for a taxi in the cue at the Grand Hyatt Beijing one night. Three times a cab turned into the circle only to be quickly taken by people that held up their phones and said "Didi Dache." When I expressed my dismay that they were "taking my cab," I was informed that Didi Dache is "the Uber of China."

MR: A lot of U.S. investors are worried that China's growth could be slowing dramatically in the next few quarters. Are these fears on target or misplaced?

KC: I think people worry too much about a slowdown in China's growth. China's growth rate has declined and is going to continue to decline for a long time. But this isn't news.

Nearly all experts agreed that it would slow down, as the 10%-plus growth rate was simply unsustainable. It was one of the only things I can remember everybody getting right. So, the growth has slowed from over 10% to now about 7%.

The Chinese government has both called for this to happen and helped to make it happen. I think the current growth target of about 7% is achievable for the foreseeable future. Eventually, it will slow to 6%, then 5% and so on.

But here's what everyone's missing. Since the economy is so much bigger today than it was 10 years ago, the absolute amount of growth is greater, because the base is now two or three times larger.

MR: And what about China's central bankers, do they seem committed to growth?

KC: The Chinese government is clearly committed to growth. However, they have recently taken a somewhat stronger stance that the quality of growth is as or more important than growth itself. The Chinese government has been aggressive in trying to curb the climb in housing prices while not destabilizing the real-estate sector completely.

Heretofore, they have been seemingly effective, but this is still in the early stages, and risks are clearly heightened in the real-estate and finance sectors. The government has also been serious in their crackdown on corruption while acknowledging that those efforts may also weigh on near-term growth.

MR: How is the "tech industry" doing in China overall, and what are some of the breakout sectors?

KC: In short, e-commerce is booming in China. The wave of consumerism in China is going online. Increased access to high-speed Internet connections and falling smartphone prices are leading to a profound shift from traditional consumption, i.e., at the mall, toward e-commerce.

In fact, the China Chain Store & Franchise Association just released figures indicating that traditional brick-and-mortar retail had a decline in both employees and locations in 2014. Last month, Beijing's nearly 20-year-old Buynow (Bainaohui) electronics market closed after seeing visitor numbers decline by nearly 80% over the past decade.

One analyst recently described the brick-and-mortar retail situation in China as a "recession." Meanwhile, the same report indicated that China's online retail market had grown by 100% in 2014. The smartphone market that is helping to fuel this growth also is showing tremendous growth.

MR: We hear a lot about what a huge market China represents for mobile. How big is that market, and what are some of the factors driving it?

KC: It surely is a huge opportunity, and it's happening and it's early. You have to remember that most Chinese don't have high-speed broadband coming to their homes via coaxial cable – and never will. They also don't have desktop computers to the extent that we do.

What this means is that the smartphone connected to wireless broadband is their first and only access. They are "leapfrogging" the desktop PC model if you will.

The factors driving online and mobile behaviors in emerging markets are the same as in the U.S. App-based business models are changing China the way they are changing the U.S., but whereas mobile is a substitute for desktop in the U.S., it's the only way for many in China and other emerging markets.

Chinese smartphone maker Xiaomi, which is focused on entry-level devices, reported 60 million units shipped in 2014 – almost all of them sold online. Xiaomi overtook Samsung to claim No. 1 share of China's smartphone market in 2014. Not bad for a company founded less than five years ago.

MR: Of course, EMQQ is not just focused on China but on emerging markets in general. Why should U.S. investors have exposure to this area?

KC: You're right. The EMQQ index includes companies from India, Brazil, South Africa, and other emerging markets. But China is the largest weight. China is the biggest and most advanced emerging market from the standpoint of both consumerism and e-commerce.

However, the same foundational ingredients are in place in most of the developing world. There are over 1 billion consumers coming online in India, Indonesia, Africa, and the rest of the developing world. These markets also lack traditional consumption infrastructure and have fragmented retail distribution.

They're getting mobile broadband Internet access and cheap, powerful "pocket-sized supercomputers" for the first time. As these powerful trends continue, so too will the growth of e-commerce in these markets.

And the numbers are frankly hard to ignore. The combined total revenue for the 44 companies in the EMQQ index grew by over 39% in 2014 after averaging 41.5% for the previous five years.

MR: I'm sure a lot of readers would like to know more about your selection process for EMQQ. Tell us how you pick the stocks that go into the portfolio.

KC: EMQQ uses a traditional rules-based index. Any and all publicly traded Internet and e-commerce companies that get the majority of their revenue from emerging markets are eligible for inclusion in the index if they meet certain size and liquidity thresholds.

The index is reconstituted and rebalanced semiannually. Today there are 44 companies in the index. The index utilizes a market-capitalization weighting system that is modified to limit the largest position to 8% and ensure diversification.

MR: How should investors look at EMQQ? Is this set up for big short-term gains, or is this more of a long-term play where you can average in over time?

KC: EMQQ is for long-term investors. Nobody should invest in emerging markets who doesn't have a long-term perspective. By many accounts, the growth of the emerging-markets consumer is going to be quite robust for at least the next 10 years.

I think EMQQ provides investors with a way to get exposure to this long-term growth story in a way that captures the generational changes in consumption patterns. Or, more simply, it's the emerging-markets consumer meets the smartphone.

MR: Thanks, Kevin. I hope we get a chance to talk again soon.

[amt] 27/4/2015 08:27

the market surges again this morning but JMC shows no movement. The Discount is getting even wider. It should be 2.30 not 2.18, strange things going on. Perhaps they should buy their own shares.

[loganair] 25/4/2015 15:51

China: Where Slower Growth Is Part Of The Plan:

The new numbers are out, and the trend remains in place: In the first quarter of 2015, China's economy grew 7 percent-the slowest quarterly pace since 2009. The data comes on the heels of 7.4 percent growth in 2014, a figure that missed the Chinese government's target and was the slowest annual tally since 1990. The most fearful of economic observers still see a possible hard landing in the future. But the optimists see China's economy changing according to plan.

For some years now, China has been in deliberate transition to an economic model as reliant on domestic consumption as it is on exports, as well as one that is less driven by public investment. In the process, the country's economic targets have expanded beyond its historical single-minded focus on GDP growth to include things like healthy employment numbers, income growth and social well-being. The 7 percent growth rate isn't even really a surprise; rather, China's current Five-Year Plan, which expires this year, included a target of 7 percent growth in 2015. Indeed, that growth rate is what Premier Li Keqiang was referring to last month when he said the economy had entered a "new phase of slower and better-balanced growth."

In 2010, China aimed to keep urban unemployment under 5 percent through 2015, and it has averaged 4.1 percent over the past five years. There's been plenty of job creation in the cities-51 million new urban jobs in the past four years. China has also successfully boosted income in the countryside, reducing the income gap between urban and rural workers. Overall, income has risen by 67 percent in rural areas and 51 percent in urban areas. "This is one of the important objectives of the government in order to promote inclusive and balanced growth," Credit Suisse analysts Amlan Roy, Anais Boussie and Mengyuan Yuan write in a recent report detailing China's progress on its Five Year Plan.

In order to bolster income growth and thereby consumption, the government has also sought to provide its citizens with better social welfare. The government plans to increase the retirement age in order to ease the government fiscal pressure imposed by an aging population. The state has also increased subsidies for health services: more than 1.3 billion people are covered by the country's basic medical insurance, a coverage ratio of more than 95 percent. And then there's infrastructure. China's railway network is already over 100,000 kilometers, and it's getting longer: in 2015, more than $128 billion will be invested and more than 8,000 new kilometers of railways will be built.

The Chinese government has also started governance reforms. The party is carrying out an unprecedented anti-corruption campaign across all levels of government, while also trying to improve transparency and accountability to the general public. This could help the global perception of China on many non-economic qualitative indicators.

This is a profound structural change, of course, and the transition continues to be anything but easy. The Chinese economy could slow even further, especially as China deals with increasing labor costs, oversupply in the housing market and weak demand from Europe. "It's difficult to confront slower growth and make structural adjustments at the same time," Roy, Boussie and Yuan write. "Policy makers have to seek a delicate balance between sometimes conflicting objectives." To this point, however, they appear to be finding that balance.

[amt] 21/4/2015 18:54

It's at a good discount at the moment after sudden fall last week. So some catching up to do. Markets above recent highs but this not back to 2.30 reached last week.

[protean] 21/4/2015 08:47

"The Chinese market is up by more than 80% since November. Yet as Capital Economics’ Williams puts it: “As long as policymakers are still easing, it is hard to see the rally petering out any time soon”.

So we’d hang on to China. There are various ways to invest, but one simple option for British investors is the JP Morgan Chinese investment trust (LSE: JMC)."

[amt] 16/4/2015 08:42

The market is only just back to where it was nearly 10 years ago so its got a longway to go to catch up with other markets. Maybe we will get a bubble but surely it would have to treble from here before we get into that territory.

[asmodeus] 15/4/2015 10:15

My own policy is to sell, or reduce, holdings with no,or low yields, and hang on to those paying divs., so I can keep paying my bills - taking profits where available, also to use as income. Surely there must be a set-back, either from America raising interest-rates?; the Grexit?; the election? etc.,etc.

[loganair] 15/4/2015 10:05

Even though playing catch-up, no market goes up in a straight line at some point there'll be a massive correction downwards, while maintaining it's upward trend.

The only thing is, when will this correction happen and does one stay invested or try and catch the correction by selling and hoping to buy back in just after the correction???

[loganair] 01/4/2015 10:54

The ‘special relationship’ between Britain and the US took a bit of a knock recently. For once, the slap in the face came from our end rather than from across the Atlantic.

Britain agreed to join the Asian Infrastructure Investment Bank – a China-led potential rival to the World Bank. The US had hoped we wouldn’t.

And then France, Germany, Italy, South Korea and Australia all decided to join in too.

The details of the story aren’t that important. I can’t say that I find the workings of transnational jobs-for-the-boys institutions terribly compelling.

But the big picture is clear – whatever your view on China, its economy is becoming increasingly important. And as an investor, that means it offers opportunities you can’t ignore…

China’s economic woes haven’t held back its stock market:

China has plenty of problems. The property market has been an ongoing problem. Growth has slowed to its lowest rate in 24 years, although it’s still pretty rapid, according to official figures. And China’s demographics are pretty ugly in the longer run.

Meanwhile, the key manufacturing sector is barely growing, although the latest data suggests that things might be picking up.

But as we often point out, economic growth and stockmarkets bear virtually no correlation with each other in any case. And judging by the action in the Shanghai stock exchange, all of China’s woes are rather irrelevant at the moment.

The country’s markets have had a cracking run in the last year or so. And that’s only continued in 2015. That’s partly because speculating on the property market has been swapped for speculating on the stockmarket – the number of trading accounts being opened hit the highest on record last month. (According to Bloomberg, nearly 6% of the accounts were opened by people deemed ‘not literate’, which is hardly reassuring.)

It’s also because of that modern-day financial panacea – an accommodative central bank. The People’s Bank of China (PBOC) cut its main interest rates at the end of February. Since then the Shanghai Composite index has soared to its highest level in more than seven years.

Why the boom can continue:

Can this continue? The truth is, quite possibly. As Chang Liu and Julian Evans-Pritchard of Capital Economics put it, “we think the sharp drop-off in economic activity since the start of the year, along with lower inflation, will encourage greater action from the PBOC over the coming months.”

The head of the PBOC – Zhou Xiaochuan – seems to agree, according to Bloomberg. “China’s inflation is declining, so we need to be vigilant to see if the disinflation trend will continue, and if deflation will happen or not… China can have room to act.”

In other words, expect interest rate cuts and ‘stimulus̵7;. As a result, the research group reckons the Shanghai Composite will hit 4,000 by the end of the year.

A classic cheap-money driven frenzy? Perhaps. But it’s interesting to see that global investors haven’t entirely caught on. As Josh Noble points out in the FT, “the Hang Seng China Enterprises Index – the most accessible gauge of Chinese shares for global funds – has added just 4% this year.” That compares to 17% for Shanghai.

As a result, the gap between prices on stocks listed both on the mainland and in Hong Kong has hit a four-year high – in favour of the mainland. Goldman Sachs apparently now expects offshore Chinese shares to rise by another 28% or so from current levels by the year-end.

We’ve been recommending China for a while and I’d happily stick with it just now. One way to play the market (both the mainland and Hong Kong) is to buy the JP Morgan Chinese investment trust (LSE: JMC). It currently trades on a discount to net asset value of around 9%.

[bluebelle] 02/3/2015 16:49

Some fascinating stuff there, loganair : many thanks for posting it.

[loganair] 19/2/2015 17:12

China beyond the exports boom By Graham Smith:


For China, the year ahead looks set to be one of reform. With the government no longer pulling out all the stops to achieve the highest possible growth rate, there should be a bit more room for an overhaul of state-owned enterprises and the financial system. Will higher quality, but slower growth bring with it better opportunities for investors?



That China missed its 7.5% growth target last year, albeit, by just 0.1%, is encouraging in one sense at least – it gives more credence to the government’s official position that it’s targeting the quality of growth over growth itself.

That means less credit-fuelled government spending and investment and a stronger consumer economy - something President Xi Jinping describes as China’s “new normal”.

The question for investors is whether China’s new growth model - higher quality, but less of it - will nurture better opportunities.

China’s stock market might appear to reflect some confidence in that direction. While there has been a marked increase in volatility since November, it has performed strongly since last summer.

Part of that may have been down to expectations that a growth slowdown would lead to lower interest rates.

The People’s Bank of China cut rates last November and reduced bank reserve ratio requirements earlier this month (the amount of cash banks have to hold to set against the loans they’ve made) to help put a floor under growth.

Steps towards improving the operating efficiency of state-owned enterprises (SOEs) have been welcomed too. In the past, SOEs have been at the centre of the debate about the inefficient use of financial capital, an increasingly sore point in a slower growth economy.

Not that all of China is slowing. Far from it, in fact: domestic consumption has continued to outpace the economy as a whole, with total retail sales growing by 12% last year4.

That reflects deep shifts underway in society, in terms of changes in lifestyle, higher disposable incomes and government-led urbanisation.

One of the things in China’s favour, in the realm of technology especially, is “latecomer advantage”. Technologies from the west can be replicated without the need for years of trial and error – they can “leapfrog̶1; the costly, but necessary stages weathered by innovators and early adopters.

This could mean, for example, a consumer jumping straight to a smartphone, without ever having had to be tied to a home-based PC. For retailers, that removes an important obstacle to their holy grail – consumers that can shop anytime, anywhere.

That seems to be happening in China, with online sales rocketing by almost 50% last year. Unsurprisingly, China’s largest online retailer, Alibaba, which achieved the world’s largest ever share sale in 2014, broke online records on Singles Day last November.

That’s not to say consumer-related companies are enjoying universal success. Unilever, for example, reported a 20% fall in Chinese quarterly sales last month, blaming trade destocking of its personal care and homecare products.

Then China’s automotive industry association said that car sales fell by 1.1% in January, despite another record month of production.

Numerous risks to investing in China in the midst of a broad slowdown remain and that’s reflected in valuations. Even after the stock market’s surge latterly last year, the MSCI China Index trades on a multiple of just 10.5 times the amount earned by Chinese companies over the past 12 months7. That represents a substantial discount to the rating applied to world equities, which have to operate in a much slower growth environment.

One risk is that the central bank may find it difficult to cut interest rates much further, even if economic conditions demand it. The prospect of higher rates and a strengthening US dollar threatens a shift of international funds westwards out of China. There’s also the risk that a weak property market could start to have a bigger impact on consumer spending.

In the longer run though, and with the benefit of hindsight, today’s valuations could look to have been excessively conservative. If today’s growth slowdown urges the government to push through reforms that, ultimately, galvanise consumption and household incomes, it may yet turn out to have been a critical step in the development of a broader and deeper consumer economy.

[loganair] 15/2/2015 11:22

Profit from this previously off-limits superpower:

Now, unlike the other three survival actions, this one is fairly high-risk. But by the same token it could also land you some major rewards.

Right now, we're very bullish on China, which probably seems strange to a lot of mainstream investors.

After all, China's economy is slowing. During 2014, China's GDP grew at its slowest pace since 1990 – 7.4%.

So why are we recommending you invest in a slowing economy?

Well, broadly speaking the Chinese economy is actually doing better than most people expected.

China is keen to change the focus of its economy. It has been too dependent on building as much stuff as possible, and keeping unprofitable factories afloat.

Now it wants to move towards being an economy that's driven by demand from domestic consumers, rather than overseas buyers or huge road-building projects. And the progress on this front is promising.

And there are two, highly compelling, reasons we're backing China right now.

Two reasons to invest in China:

#1. Chinese stocks are cheap – massively cheaper than they were when they last peaked in 2007. And one good way to make money in markets is by buying things when they are cheap, and selling when they get expensive.

(That's why we think it's such a bad idea to hold US stocks right now.)

As analysts at ETF Securities recently put it, it's: "not often that the stock market of one of the world's largest and fastest growing economies is trading at one of the world's lowest valuations."

#2. The Shanghai-Hong Kong Stock Connect.

Essentially, this is a way for foreign investors to get more access than ever before to mainland Chinese stocks (known as A-shares), via Hong Kong.

This 'connect' has now opened. And that means a lot more money is pouring into Chinese stocks – because a lot of people want to be positioned to benefit.

It makes now look like a sensible time to get some exposure to China for yourself.

[loganair] 03/1/2015 12:50

China – new order aims for slower and better growth with the closure of inefficient state-owned enterprises

It is an old saying with the Chinese, look at what they do and not what they say

Beijing calls for addiction to growth driven by industrial exports, infrastructure and real estate to stop.

Job creation needs to be led by private enterprise and even foreign enterprise. This may lead to the privatization or part sale of state owned businesses.

Corruption is being routed out, though it may also serve to consolidate President Xi Jinping’s power.

We still expect to see China investing in huge infrastructure projects around the world as part of their effort to win new political allies with a new $50bn canal to cross Nicaragua to rival the Panama Canal.

China to extend subsidies on electric vehicles up to $8,800 per vehicle up to 2020. The move is aimed at reducing pollution and reducing China’s oil imports.

[loganair] 31/12/2014 14:24

Apart from the two monster, US$725 billion gas deals - Power of Siberia and Altai pipeline - and a recent New Silk Road-related offensive in Eastern Europe, virtually no one in the West remembers that in September Chinese Prime Minister Li Keiqiang signed no fewer than 38 trade deals with the Russians, including a swap deal and a fiscal deal, which imply total economic interplay.

A case can be made that the geopolitical shift towards Russia-China integration is arguably the greatest strategic maneuver of the last 100 years. Xi's ultimate master plan is unambiguous: a Russia-China-Germany trade/commerce alliance. German business/industry wants it badly, although German politicians still haven't got the message. Xi - and Putin - are building a new economic reality on the Eurasian ground, crammed with crucial political, economic and strategic ramifications.

[loganair] 29/12/2014 16:53

By Selin Bucak - Capital Economics - Calls for 2015:

China will avoid a crash

'China to slow a little further, but avoid a 'hard landing'. GDP growth will continue to slow, rather than rebound - as some expect. In particular, the property sector has not yet bottomed out. Nonetheless, policy makers still have plenty of tools to prevent a crash, and reforms are proceeding well.'

[loganair] 24/12/2014 23:06

By James Carthew director at Marten & Co on Dec 22, 2014

I started off 2014 by saying I found it hard to forecast what was going to happen to markets over the course of the year. For China, worries grew over the scale of credit growth within the economy and some suggested the country’s property bubble would burst and its shadow banking system implode in 2014, with a major adverse effect on the economy.

GDP growth rates slowed too. Forecasts were for about 7.5% growth at the start of the year and many commentators revised this downwards as the year progressed.

Ignore the headlines:

Dale Nicholls, manager of FCSS, is more sanguine however. He thinks it is easy to get fixated about headline GDP numbers and falling property prices and thereby miss the big changes that are going on in China’s underlying economy.

He says that even if growth is slower than in previous years, it is still growth and much faster growth than is prevalent in most of the rest of the world.

Within this context, well managed companies have ample room to grow. He thinks those serving the needs of China’s burgeoning consumer market are particularly well placed.

Nicholls is enthused about the potential impact of social reforms in China. He believes changes to the hukou system of household registration (which effectively governs where you are allowed to live within the country) have the potential to dramatically improve the lives of around 100 million workers.

These people, who have been encouraged to migrate to cities in search of work, will now get access to social welfare and healthcare benefits currently denied them. Robertson thinks these people will save less and spend more, boosting consumer demand.

Then there is the relatively low rating of Chinese companies compared to their developed market peers. At the end of October, the price to earnings ratio on the MSCI China index was just 9.5 compared to a multiple of 18 for the S&P 500 in the US.

In the long run it seems nonsensical that this disparity will persist. Deregulating who can invest in the domestic Chinese stock market (alongside allowing Chinese people access to international markets), could help narrow the gap.

So maybe things in China aren’t as bad as feared. Its stock market has made decent gains year to date – the MSCI China is up 13.3%, which is quite respectable and ahead of the wider Asian region. FCSS though has outperformed the index by some margin – how did it manage this?

One big winner this year has been its holding in Alibaba. FCSS took a stake in this while it was still unquoted and reaped the rewards when Alibaba (BABA.N) floated in September – the largest initial public offer (IPO) ever. Pre-IPO investments have fallen in and out with shareholders of investment companies over the years.

The thing is they are great when they work but a nightmare when they don’t. The sector is littered with examples of funds that took stakes in something that was about to float but never made it and ended up being a time consuming and hard to explain drag on returns for years after.

When they work, however, they can work very well. At the opening value of Alibaba, FCSS was sitting on a stake worth 4.6 times its initial investment. Robertson has taken some profits but Alibaba was still the second largest holding in the portfolio at the end of October.

Alibaba is just one of a number of internet-related consumer stocks that feature heavily in FCSS’s portfolio.

The largest holding is Tencent (0700.HK) (messaging, social networking, e-commerce and gaming) but BitAuto (BITA.N), an online marketplace for cars; and Netease (NTES.OQ), search engine and online gaming company, both also figure in the top 10.

IT is the largest sector exposure, 27.5% of the portfolio at the end of October – double the weighting in FCSS’s benchmark. The largest overweight is to consumer discretionary stocks (23.5% against the index’s 5.3%).

The corresponding underweight is to financials, where Robertson is worried about holding banks given the potential for non-performing loans, and telecoms, where he doesn’t hold China Mobile (0941.HK), the second largest stock in the index after Tencent.

I suppose the big question is whether this good run of performance is sustainable? Some of the larger holdings trade at quite high P/E multiples and they will need to keep delivering growth to maintain these ratings.

While there could easily be some major wobbles in the Chinese stock market over 2015 – especially if deleveraging the economy proves less easy than the authorities hope – the long-term picture still looks rosy.

The scale of the opportunity for successful Chinese companies is as vast as it has always been. Above all, I think FCSS’s discount is too wide. This might reflect general investor nervousness about the state of equity markets but it seems overdone to me.

FCSS has been quite good at buying in stock in the past and, if investors aren’t yet persuaded of the merits of the fund, perhaps they should pick up the pace of these again.

[loganair] 21/10/2014 21:21

China slowdown: time for investors to climb on board?

China's economy is slowing.

The latest figures confirm it. During the quarter just gone, China grew at its slowest pace since 2009.

And it looks like annual growth will be the weakest since 1990.

It's hardly as if this is unexpected. People have been predicting a slowdown for China at regular intervals over the past decade.

But although it doesn't sound like it, this slowdown could be good news for China – and investors in the country…

China's gross domestic product (GDP) grew by 7.3% in the third quarter of 2014. That was the slowest performance since the aftermath of the financial crisis in 2008, and roughly in line with what analysts had expected.

The main thing holding back growth is the bursting property bubble. In the first nine months of the year, sales fell by 10.8% compared with the same period in 2013. Property prices are falling, and while investment in real estate is still growing, it's at a much slower pace.

China's slowdown is one of the main reasons behind the slide in commodity prices and might have some way to go yet, partly because many of those commodity stockpiles were being used as collateral for loans, rather than to actually build anything.

It's also bad news for resource-dependent Australia. The Australian dollar has dropped a long way off its perch since the days it was running neck and neck with the US dollar. But I wouldn't be surprised to see it fall further from here in the longer term.

That said, broadly speaking the economy is doing better than most people had expected. China is keen to change the focus of its economy. It has been too dependent on building as much stuff as possible, and keeping unprofitable factories afloat.

Now the desire is to move more towards an economy that's driven by demand from domestic consumers, rather than overseas buyers or huge road-building projects. And the progress on this front is promising.

As Julian Evans-Pritchard of Capital Economics points out, wages are rising faster than GDP growth, which means "that the average household is enjoying an increasing share of the dividends from growth". That means "consumption is holding up relatively well".

In other words, even though "growth has slowed, it reflects a welcome rebalancing away from excess investment in certain sectors… and is not cause for significant concern".

No money-printing and slowing growth – but China's still a buy

Clearly, there's also the hope that if growth slows too much, China will feel the need to do the equivalent of quantitative easing (QE). It'll pump a load more credit around the system to get things moving again.

I'm not as convinced that this will happen. China needs to change, and the trouble with things like QE is that they hinder change. QE in the US and UK has turned into a way to keep a broken model running beyond its sell-by date. That's the last thing that China wants if it's at all serious about moving towards being a more consumer-oriented economy.

I imagine that instead, China's leaders would rather do just enough to prevent a major social or economic meltdown. That may still mean a lot of stimulus getting done, but I wouldn't be betting on a 2008-style stimulus package.

As Capital Economics puts it: "with policymakers now prioritising employment and economic rebalancing over growth, we don't think they will feel the need to act aggressively to shore up the economy in response to today's data".

A slowing economy? With no money printing on the horizon? It doesn't sound like a promising scenario for investors.

However, there are reasons to get excited about Chinese stocks. For a start, they're cheap. And one good way to make money in markets is by buying stuff when it's cheap, and selling when it gets expensive.

There's a more specific reason why investors are getting excited about China just now – it's what's known as the 'Shanghai-Hong Kong Stock Connect'. Essentially, this is going to be a way for foreign investors to get more access than ever before to mainland Chinese stocks, via Hong Kong.

Frustratingly for the brokers and regulators concerned, the government keeps pushing back the deadline for the connect to start – it had originally been expected by the end of this month. But it still seems likely to start soon.

The end result is that a lot more money will be going into Chinese stocks, and a lot of people want to be positioned for when that happens. It makes now look like a sensible time to get some exposure to China for yourself.

[igoe104] 05/9/2014 08:49

Moving up nicely and still lots of catching up to be done.

JPMORGAN CHINESE INVESTMENT TRUST PLC: 195.36

[igoe104] 19/8/2014 08:33

This fund has lots of catching up to do, I can see it passing the £2 mark later this year.