Year of the golden pig shines bright for China

As the Chinese usher in the New Year this Sunday, will the year of The Golden Pig shine as bright for China's markets as the last 12 months?

Following a spellbinding year of growth in 2006 which saw the Shanghai index up 130%, the Shenzhen up 121% and the Hang Seng rally by 94%, there followed a sharp correction in late January. Nevertheless, markets have since bounced back to break 2006 levels. Mark Williams (pictured), manager of F&C Pacific Growth fund, said the set back was unlikely to be a precursor to more significant corrections in the near future and remains very positive on the outlook for Chinese markets.

"We have been increasing our weighting in China and although valuations are not cheap, we believe there continue to be great investment opportunties. Chinese companies are profitable and with a potentially mild inflation and rising property prices, reflation is set to continue."

Figures released by the US Commerce Department this week showed that in 2006 alone imports from China into the US surged 18.2% to a record $287.8bn. But as the US trade deficit hit a record high of $736bn, some American politicians have accused China of artificially keeping the value of the yuan down to benefit their exporters.

"Despite the controversy surrounding the US trading deficit which expanded 15.4% to a record $232.5bn with China alone, we believe the importance of that country as a trading partner will continue to grow.

"Towards the end of last year, the series of quality Chinese companies listing in Hong Kong presented the ideal opportunity to significantly raise our exposure to China," said Williams.

According to Citigroup research of the 15 biggest market cap China stocks listed in Hong Kong, 10 were listed after 2000. Last year's listing in Hong Kong and Shanghai of Industrial and Commercial Bank of China was the largest in the world. Last year the MSCI Emerging Markets' China weighting rose by about 40%.

"These listings are forcing investors to pay more attention to China. This international liquidity is also being compounded by domestic investors receiving little interest on their savings. Domestic fund raisings by institutional investors alone doubled to £855bn (about $110bn) from the previous year and Beijing-based Harvest Fund management raised Rmb40bn in one day alone," said Williams.

"We continue to increase our China exposure as opportunities present themselves throughout the region. Last year we bought China Merchants Bank and Industrial and Commercial Bank of China and following the set back this year, we have added to our holding in China Overseas Land. We believe this is the highest quality regional property developer in the country and stands to benefit from the booming growth in secondary Chinese cities. We believe the company is also better placed than its competitors to negotiate with local government and gain access to new land. Demand for property across the board is likely to continue with the rising affluence of the middle classes," he added.