COUNTRY ANALYSIS REPORT

Country Analysis Report: China



Country Analysis Report: China

Introduction

China has become an economic superpower and is now the world's second-largest economy. It has its sights on the United States, which it could eclipse as the world's largest economy between 2020 and 2030. Consider that the five most popular emerging markets funds have an average allocation of just 10.4% to the China market (Tyler 2010). An advisor who allocates 15% of his clients' accounts to emerging markets leaves them with less than 1% invested in China. The need for a strategic approach to investing in this region is acute. Over the past three decades, China's economy has experienced robust growth as it shifts from a third-world country to a modern consumer economy and influential source of economic power (Kahn 2010). The view that China can be categorized within “emerging markets” no longer holds true, and a more accurate investment allocation to the Asian nation should be similar to those of other developed countries. In essence, China is no longer emerging, but rather, has emerged. Incrementally, when investing in a broader emerging markets allocation, proper diversification must be ensured. The same principle holds true when investing in the Greater China region. The Greater China region is more complex in terms of equity share class structure.

Key statistics of the country as per Developmental Indices

GDP growth rate

Upper

Inflation

Second

Exports, Total as % of GDP

Third

Imports, Total as % of GDP

Upper

Unemployment Rate

Upper

Economic Indicators (including per capita) for the period 2004-2009

Indicators

Units

2004

2005

2006

2007

2008

2009

GDP, Constant 2000 Prices, US Dollars

US Dollars (Millions)

1712457.48

1890572.88

2109936.61

2375914.82

2589474.76

2804401.16

GDP per capita

US Dollars

1318.44

1447.26

1605.77

1797.41

1946.91

2095.01

Inflation

Percentage

3.91

1.80

1.50

4.80

6.10

0.60

Balance of Trade (Total Exports - Total Imports)

US Dollars (Millions)

22550.89

92736.78

168937.52

255326.66

441737.81

192494.33

Unemployment Rate

Percentage

4.20

4.20

4.10

4.00

4.20

4.30

Source: Datamonitor 360

China's growth IS Self-Sustaining

One of the most significant by-products of China's growth is the dramatic shifting of its population above the poverty line. According to the IMF, more than 220 million Chinese have moved out of poverty since 1978 and the middle class is expected to grow to nearly 500 million people by 2025 (Datamonitor 360). The sheer numbers of China's middle class are shifting the drivers of the country's growth from exports to consumption. China is the world's largest automotive market and energy consumer. In 2005, China's middle class consumption ranked seventh globally at approximately 4%, but within the next decade that figure is expected to grow to approximately 13%. The growing appetite among these consumers for luxury goods and commodities is expected to exceed that of their U.S. counterparts within the next 10 years. The result of this wealth shift is evident in the balance sheets of Chinese companies. Productivity is growing at 8.7%, which parallels the domestic demand as Chinese salaries and wages grow, and dividends within Chinese companies are increasing (Tyler 2010). Over the past two decades, reinvested dividends account for up to two-thirds of total returns from China. As the number of domestic Chinese consumers increase, export-oriented stocks as a percentage of total market capitalization are declining.

Active Management within the Region

The investor experience in the United States has proven the benefits of ...