China has had plenty to contend with in the past 12 months. Fears of an overheating economy and heavy-handed government efforts to slow excessive investment in certain sectors; intense speculation over the future direction of interest rates and the currency regime and a notable increase in scandals in listed companies. Given all of this, the performance has not been too bad.
China’s GDP growth appeared to be slowing towards the end of 2004 with fixed asset investment, the main thorn in the authorities’ side, registering some decline. It may still, however, stay above the target 20 per cent a year growth due to the central government’s inability to control aggregate demand.
China put interest rates up for the first time in October, indicating policy makers are shifting from purely administrative controls towards market-oriented tools in efforts to address excessive investment. At the moment interest rates are not the main tool but only part of the macro tightening programme. In the longer term the authorities want full convertibility of the renminbi, which would in turn give them greater control over interest rates and increase their options to manipulate the economy.
Overall, it looks as though China’s macro economic policy has not been as tight as feared and efforts have already been made to free up working capital to SMEs, which were squeezed last year. The central bank maintains it will continue a prudent monetary policy that will see money supply grow at 15 per cent per cent over 2005. China’s trade surplus and rapidly rising foreign exchange reserves suggest that the currency remains undervalued and the balance of payments continue to make the case for change.
Strong domestic consumption, amid structural constraints, and continued capital inflows should support a long-term uptrend for Chinese equities.
Yang Liu, fund manager of Atlantis Investment Management’s China Fund
