China's GDP posts sharpest rise in over a decade - still more to come!

Data released this Thursday revealed that in 2006 China's gross domestic product recorded its fastest annual rise in 11 years. F&C's Pacific Equities team remains encouraged by the strengthening growth of the economy.

"The numbers were higher than expected but we believe that the Chinese economy is set to continue to grow and broaden yet further," said Mike Hanbury-Williams, Head of Pacific Equities at F&C.

"Although we expect GDP growth to moderate slightly going forward, this broadening of the economic base should promote greater stability. The economy is increasingly underpinned by rising consumer spending, rather than just the strength in fixed asset investments."

Hanbury-Williams points out that fixed asset investment growth has slowed from 31.3% in June 2006 to 24.5% to the end of December 2006 on a year-to-year basis.

"It is still very strong but the slowdown serves as an indication that the Chinese authorities are succeeding in steering the economy away from being solely supported by fixed asset investments. Retail sales growth, for instance, has accelerated from 13.7% in July to 14.6% in December 2006."

Retail sales are supported by stronger growth in both urban disposable income and rural income, according to Hanbury-Williams.

"There is a small concern however that urban income is still rising faster than rural income. This may draw the attention of the government, which is trying to level out the difference in the growth rates" , he added.

In addition, taking into account the level of economic growth, and partly the recent rise in inflation to 2.8%, Hanbury-Williams expects the Chinese authorities to apply dampening measures, such as further increasing bank reserve requirements.

"We favour stocks profiting from the rise in domestic consumer expenditure, the service sector and companies that work to reduce the effect of pollution. We also remain positive on real estate, although the combination of recent strength in land prices and monetary tightening could have a short-term negative impact" , concluded Hanbury-Williams.