Could China's boom soon turn to bust?

4 January 2010

Speculation is mounting that the boom in the Chinese economy will soon turn to bust, with investors nervous of a possible correction in the Shanghai Composite Index after its astonishing rise of 119% over the past year.

But the Sinophile camp has recently been given a boost, with esteemed investment manager Anthony Bolton deferring his retirement to head a new Fidelity portfolio in the area.

Fen Sung, investment manager of Premier China Enterprise fund, says: “People have been talking about a bubble and have focused on the banking and property sectors. But there’s no bubble yet, and the government has tried to make sure it doesn’t happen by being stricter with the banks. China is a decade or two-decade story; it’s moving up the value chain.”

Of course, any emerging market should be treated with caution.

“Investment in China should not be used for income, but for growth,” says Philip Pearson, partner at P&P Invest. “If you’re seeking income from equities you should look at markets with a good dividend yield, such as the UK.”

Pearson advises those who are overexposed to China to reduce their holdings and invest no more than 10% of their portfolio in the area. He says the chance of a bubble remains slim, but if it does happen, it could represent a buying opportunity, as stocks will be cheap in the aftermath.

Charlie Awdry, investment manager of Gartmore China Opportunities fund, thinks the Chinese market is undervalued.

“One of the characteristics of a potential bubble would be extremely high valuations in the property market," Awdry explains. "But there are millions of individual property markets in China – some considered good value and some bad.

"We’re seeing evidence that property prices in big cities such as Beijing might be up 45% to 50%, but that’s not the case in other parts of the country.”

He adds that macroeconomic conditions remain encouraging, with incomes 
going up, a build-up of savings and high consumer demand – all of which bode well for continued growth.

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