Threadneedle: Outlook for China economy

Gigi Chan, fund manager of Threadneedle’s China Opportunity fund comments: In January Asian markets remained extremely volatile, due to heightened concerns over the impact of US sub-prime woes on bond insurers and fears over the likely impact of a global economic slowdown on Asian earnings and economic growth. Sentiment was hit by the worsening global credit crunch, the strong oil price, rising Chinese inflation and concerns over the sustainability of Chinese growth given the global slowdown.

Following a period of strong performance in 2007, Chinese markets and Chinese shares listed on the Hong Kong stock exchange experienced a sharp correction, as the MSCI China index fell -21.6% in local currency terms and -21.5% in sterling terms.

However, although global risk aversion has resulted in volatility, the structural growth story in Asia remains intact and regional economic growth remains relatively strong despite downward revisions to economic growth figures in Hong Kong and Singapore. In China, both liquidity and economic and earnings growth remain relatively strong and the country continues to see robust economic growth from structural and demographic changes, which underpins the long-term health of the equity markets.

There has been a combination of negative news hitting the Chinese markets since the start of the year. Not only have we had an increase in rising global macro concerns, which raises the risk of slower export growth, but China has also had severe snowstorms, which are likely to have an adverse effect on first quarter economic growth. Added to this, the risk aversion that has characterised world markets in recent weeks has seen Chinese stocks undergo a de-rating. After such a strong move from last year, it has not been surprising to see a fair amount of profit taking.

However, we continue to believe that the Chinese economy remains structurally robust, driven by strong domestic consumption, as evidenced by an acceleration in retail sales growth and increased infrastructure spending.

Recent weakness has thrown up opportunities in good, well-managed companies with strong domestic franchises. As ever, stock picking remains absolutely key. When the global environment stabilises, investors are likely to refocus on strong fundamentals. In the meantime, it is important to ride through the volatility.