How can you capitalise on the world's best growth story?
So it's official: China has overtaken Japan as the world's second largest economy. Only America's economy is now larger.
That, at any rate, is the interpretation put upon second-quarter GDP figures released yesterday, which showed that Japan's economy grew far more slowly than had been expected, meaning that China had finally eclipsed it.
What's more, according to forecasts by Goldman Sachs, by 2027 China is expected to eclipse America as well, and become the world's largest economy -- although some observers put the date even sooner. The World Bank, for instance, expects China to overtake the US as early as 2020.
So is China ex-growth?
So are investors too late to board the Beijing gravy train? Far from it.
Chinese officials, for example, are still keen to paint a picture of China as a developing country. GDP per head in Japan, for instance, is ten times higher than China's £2,300 per capita figure.
And although China might overtake America to become the world's largest economy by 2020, that same World Bank report still expects Chinese GDP per head by then to be just a quarter of that enjoyed by American citizens.
Nor is China's GDP growth evenly distributed across the economy. The coastal cities are decades ahead of the interior, infrastructure is still weak, and a property boom has inflated land prices.
It's the consumer, stupid
Nevertheless, fund management firm Fidelity -- who clearly have Chinese-oriented funds to promote -- makes some telling points about China's potential.
- Having contributed 3.7% to the global economy in 2000, China is forecast by the IMF to account for 11.1% of world output in 2014.
- China overtook Germany to become the world's largest exporter in 2009, accounting for an estimated 9.9% of global exports last year.
- Household savings deposits in China have increased rapidly, from US$645bn in 1998 to $2,341bn in 2007.
- The United Nations has estimated the urban population in China will exceed the rural population by 2020.
- China became the world's biggest market for new vehicle sales in 2009, but still lags the developed world in terms of car ownership. In 2007, there were more than 250 million registered motor vehicles in the US, compared to 28.8 million in China.
To me, that paints a picture of continued consumer-led growth -- and at faster levels than we're likely to ever see in the UK again.
And it's one reason why I chose to invest in Anthony Bolton's Fidelity China Special Situations (LSE: FCSS) back in March. I may have lost the duel, but the fund is beating the FTSE over the same period, and I'm convinced that it's a decent long-term bet.
"My enthusiasm for China after three months in the region is unstinted," said Mr Bolton, yesterday. "I believe many areas in China will show rapid progress over the next 10 years."
Fund, ETF, or direct investment?
There's certainly no shortage of opportunities to invest. One popular fund supermarket lists over 80 funds with significant levels of exposure to China, including a good number solely devoted to the country.
Index-tracking ETFs are also available. iShares, for instance, offers the iShares FTSE/Xinhua China 25 Fund (LSE: FXC), which tracks 25 of the largest and most liquid Chinese stocks (both 'Red Chips' and Hong Kong shares) listed on the Stock Exchange of Hong Kong. Lyxor, meanwhile, has the Lyxor ETF China Enterprise (LSE: LCHN), which tracks a number of Chinese stocks listed on the Hang Seng.
Another -- less Hong Kong-centric -- choice would be iShares MSCI AC Far East Ex-Japan (LSE: ISFE). Among the 400 or so Far Eastern shares that it tracks are around a hundred Chinese companies incorporated in the People's Republic.
HSBC (LSE: HSBA) is looking to get in on the act, too, and tells me that an offering is planned before the end of the year, although no decisions have yet been taken on what precisely it will track.
And for those whose appetite for risk is a little greater, there's always the option of investing directly. Several Chinese companies have listed on the LSE, including one with a strong consumer proposition: Asian Citrus Holdings (LSE: ACHL), which I wrote about last September -- since when the price has more than doubled.
The bottom line
Despite China's economy now being the world's second largest, GDP per head remains low, and the Chinese consumer's propensity to save remains high.
In short, it's an opportunity with two separate upsides. First, demand fuelled by increasingly affluent consumers; and second, the increasing global scale -- and reach -- of Chinese businesses.
That said, I'm cautious. Corporate governance is not always all it could be in China, and the legal and accounting systems do not -- to put it mildly -- always operate to Western norms.
So while I'm tempted by China's ETFs as a way of spreading those risks, I'm for the moment happier to pay Mr Bolton and his team in Hong Kong to research and invest in companies where they have spent some time kicking the tyres.
But I'm aware that other investors have different views, and that more than a few of you own Chinese shares directly. So what's your take on investing in the world's second largest economy? Comments in the box below, please!
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