Threadneedle: Potential of the Chinese market

Gigi Chan, China Opportunities Fund Manager at Threadneedle, comments: "China's dynamic growth looks set to continue as it makes its transition from an emerging to a developed economy, and even with a projected slowdown in 2008, we should still see 10% growth- far superior to the rest of the world. Rising incomes and a high savings rate are creating a burgeoning domestic consumption theme in China. In this respect China is a mirror image of the developed western economies - while the U.K. and U.S. are grappling with high consumer indebtedness and a sharp slowdown on the high street, Chinese retail sales are growing at around 20% per annum.

"The Olympic Games have driven considerable building works in and around Beijing, but these projects are only a small part of a far bigger theme unfolding across the region. Rapid urbanisation is creating strong demand for real estate, and China is undertaking vast long-term projects to improve transportation networks and other infrastructure. Indeed, half a trillion US dollars has been earmarked for transportation infrastructure investment for the five year plan 2006-2010.

"There are a couple of key near-term risks to investing in China. The first is inflation. However, relative to other economies, China is better placed to deal with inflationary pressures given its policy flexibility. The strength of China's fiscal position gives the authorities the option to absorb food and oil price pressures through increased subsidies, while they also have the option of faster currency appreciation to combat imported inflation.

"The second key risk is that, along with other emerging markets, Chinese stocks are viewed to be riskier and therefore get sold off when risk appetite recedes on global concerns. We think this has been unjustified given the relative strength of the Chinese economy and the resilience of corporate profitability, driven by strong demand growth and productivity improvements. Like the consumers, Chinese corporates also have low levels of indebtedness and can afford to invest in their growth going forward. The market is not expensive if you consider the longer-term growth potential it offers."