What next for China?

As China begins its New Year celebrations, Jing Sun, manager of the PSigma Global Equity fund, reports back from a recent trip to the region and looks at what the next 12 months have in store.

I have just returned from Hong Kong and Beijing following my annual research trip. I came away encouraged that the excess industrial capacity and real estate worries are not nearly as bad as many have been suggesting in the West. On the other hand, I do not expect any bold policy actions from China in reaction to further problems from Europe if they develop.

One key conclusion reached was we will continue to avoid many exporters based in China that require better overseas growth or domestic stimulus. Instead, we will maintain our focus on world class multi-national companies, in China and elsewhere.

Developments

The change in China from my youth, as well as when I began my investment career in 1994, continues to amaze me. Anecdotally, traffic in Beijing has become markedly worse from my last visit but the air quality in Beijing seemed somewhat improved and not quite as dreadful as one reads about in the Wall Street Journal. The complaints of ordinary citizens, however, have changed little from recent years; top of the list being corruption, traffic, and high cost of housing.

I sense inflation has become a bit more of a concern for the Chinese people than it had been in the recent past. The sky-high cost of housing, especially in major urban centres has also moved up the list of major worries for many people with no evidence of softening materially.

Other signs of economic robustness include the fact that finding a taxi in Beijing is getting harder, shops and restaurants are quite busy, and the living standards for most ordinary Chinese continue to improve. This last item is the single most important thing for both the average Chinese person and their rulers.

The stability of the country and the durability of China’s long-term economic growth are very much dependent on the sustained improvement of the living standard of ordinary Chinese citizens. The most important and exceedingly tricky job for the Chinese ruling elite today is managing the many negative side-effects of the break-neck speed of economic development in China whilst also keeping peoples’ living standards rising.

Fortunately, so far, China has performed this high-wire balancing act rather admirably and indications suggest that China will have a fairly soft landing despite global economic sluggishness.