Olympics not the starting gun for China

China's economy will continue to develop beyond the forthcoming Beijing Olympic Games, according to JPMorgan Asset Management's Pinakin Patel. He said the ongoing economic transition, where China is gradually moving up the value chain in terms of production, has been taking place over the last decade and will continue to do so after the games.

Pinakin Patel, Far East Client Portfolio Manager said of the reported USD 1,712 billion of fixed asset investment in 2007, only USD 48 billion was spent in Beijing. Further to this, of the USD 34 billion the Chinese government estimates as the full spend on the Olympics, just USD 8 billion is directly related to the games, the rest is being spent on infrastructure for Beijing such as new airport links and an extension to subway systems.

The majority of fixed asset investment has been focused on infrastructure in the inland provinces in a bid to reduce China's dependency on highly developed coastal cities and increase the importance of less developed rural areas.

As well as fixed asset investment which provides good infrastructure, the Chinese government is also implementing policy changes such as labour rules, anti-pollution regulation and tax unification. These steps are aimed at moving China up the value chain to provide high end value added goods.

These changes, in addition to high input prices (electricity and commodity prices) have impacted margins for lower end manufacturing businesses such as clothing, furniture and watches - historically the core of China's export industry. However, through the cultivation of foreign joint ventures China is gradually transitioning to high end manufacturing, largely to meet the increasing demand.

Pinakin Patel said, "China has long been considered the workshop of the world, providing low cost goods at minimal cost. The reality could not be further from the truth, for example more than 70% of the world's laptop computers are manufactured in China. In 2007, the growth in high value industries, such as the auto industry, grew by over 90% and shipping by 50% in value terms, whilst the so called old economy sectors such as toys and footwear rose by only 15 to 20% in the same year.

In the ten years to 2007 exports for low-end goods fell by approximately 10% while exports of high end goods rose by 25%. Today, machinery and equipment represents 48% of China's total exports.

China has stated very clearly that it intends to see higher levels of mergers and acquisitions and consolidation in a number of key industries. For example there are over 250 state owned enterprises and the aim is for the government to identify 30 or so state leading companies that can compete not only domestically, but also globally.

Patel concluded, "As China becomes a focal point for the Olympics, we continue to believe that China offers good long term investment opportunities and by focussing on its new export market will provide some shelter from the world's wider economic uncertainties."