• The emergence of China as a major economic powerhouse is, in
our view, the most significant event on the world economic scene
in the 21st Century.
• China’s economic development is comparable to that
experienced by the USA at the beginning of the 20th century, and
by Japan and Germany after WW2.
• China’s economic acceleration is attributable to a number of
driving factors; two decades of economic reform culminating in
their accession to the WTO, cheap and educated labour force (1.3
billion people, constituting 20% of the world’s population), a
growing middle class eager to improve their standards of living.
• A stable, even if opaque, political system and an administration
committed to transforming China into a competitive global
economy.
• A deeply-entrenched culture based on order, hard work, saving,
respect for elders and entrepreneurship.
• Accession to the WTO in December 2001 expedited economic
reform and opened the world's markets to Chinese products,
creating and environment for China to become the world’s main
production engine.
• Foreign Direct Investment is running at a clip of 40 to 50 Bln a
year.
• A combination of Infrastructure and Productive Investments with
cutting edge technology, and an ample pool of cheap, skilled labor
makes China’s competitive position on the world stage unique.
• At USD 1700 GDP per Capita, the Chinese population is fulfilling
its primary needs and is poised to become the world largest
consumer society.
• It is predicted that growth will continue at an average rate of 8 %
p.a. for the next decade as China moves from its position as the
world’s 6th largest economy in 2003 to the 2nd largest by 2020.
• China's GDP already represents 4 % of the world GDP and more
than 10 % on a PPP basis.
• Undervalued equity markets. Strong economic growth and
ever-improving corporate management is generating strong
earnings growth. H and B shares, not yet accessible to domestic
investors, are trading well under par.
• We predict a Substantial re-balancing of Global Portfolios in
favor of Chinese equities, resulting in Sustained Capital Inflows
and an extended period of Valuation Expansion.
• Liberalisation of the Renminbi. The Renminbi was pegged to the US$ at 8.28 since 1997. It was revalued to 8.11 in July 2005 and pegged to a basket of foreign currencies. It trades now within a narrow band. Analysts believe it is undervalued by up to 40%. China has agreed to float its currency by 2008 and is under pressure to do so even sooner
The most appropriate comparison that can be made to the current
situation in China is that of Japan in the ’70s and the ’80s, as it moved
from a devastated economy after WW2 to the world’s second largest
economy in 1990.
One USD invested in the Nikkei in 1975 was worth USD 120 in 1989 as
the Nikkei moved from 1500 to 39000 and the Japanese Yen
appreciated from 360 to 100.