China's time has come, adviser says
Asian giant has become economic juggernaut. But the U.S. is pressing for revaluation of the currency, which would make investment there more costly
RAY TURCHANSKY
CanWest News Service
Monday, October 13, 2003
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In the 1967 movie The Graduate, Mr. McGuire gave Dustin Hoffman's character, Benjamin Braddock, one word of investment advice: "Plastics."
In 2003, Jonathan Passmore of GE Asset Management Inc. offers another word: "China."
"China is a wonderful long-view market," Passmore said.
"It is in the early stages of development of its economy."
Passmore's firm is a sub-adviser of Talvest Fund Management's International Equity Fund.
Talvest also invests more directly in China through its China Plus Fund, managed by Peter Chau.
China Plus has been the epitome of volatility, up 27 per cent in the past three months, but with calendar-year returns ranging from a 203-per-cent gain to a 21-per-cent loss during the past five years.
The International Equity Fund is up 9.6 per cent in the last three months, and down 7.9 per cent in the past year.
But long-term, because of sheer scale, China will be an investment mecca, Passmore said.
It has 1.3 billion people, annual gross domestic product growth of 9.76 per cent over the last two decades, and $52 billion U.S. in foreign investment last year.
"China is no longer an economy producing low-cost textiles and cheap toys," Passmore said. It has become a major manufacturer of everything from plastics to products for the aviation industry.
"One of the great ironies to me is that Mexico is losing jobs to China," Passmore said.
"India is losing jobs to China."
Politicians in the United States are so afraid of losing production to China that they have been pressing for a 20- to 30-per-cent revaluation of its currency, the renminbi, now pegged at 8.2 to the U.S. dollar.
Revaluation would have effects.
"Their exports would become more expensive," Passmore said. "That would - although I tend to disagree - level the playing field a little bit, so it would be easier for American companies to compete with China. It would make investing in China more expensive."
He feels the revaluation sought by the Americans would be a mere hiccup to the Chinese economic juggernaut.
"The average manufacturing worker in China earns one-28th of his counterpart in the United States.
"When you add that to the fact 30 million workers a year are coming into urban China looking for jobs, you know that wages are going to stay low.
"You need much more than the 20- or 30-per-cent revaluation."
And China is resisting one-step revaluation, but might allow incremental moves.
"They may allow Chinese tourists to take more money when they go overseas.
"They're suggesting they will allow foreign exporters to hold foreign currency, they won't have to change it back. Another thing they're suggesting is QDII, Qualified Domestic Institutional Investors, which means that Chinese companies will actually be able to invest overseas, to buy factories."
But investing in China is not without problems.
There aren't too many Chinese companies to directly invest in, so fund managers have to search for companies whose major growth and capital for the future is selling products to China.
Another risk is the Chinese banking system, said to be as precarious as Japan's.
"Absolutely," Passmore said. "The banking system is in disarray.
"The analogy to Japan is accurate. Non-performing loans in the Chinese banking system are somewhere between $500 billion and $600 billion.
"Why is it this bad? Because of a lack of proper credit controls, lack of supervision of administration.
"China's not without risk. I'm not saying this is a slam dunk, that you can go in and invest and live happily ever after."
Regardless, many companies appear to have come to terms with circumstances in China.
McDonald's, for instance, is adding 100 restaurants there by the end of 2004, for a total of 660.
The risk in investing in China might be much greater than the risk in ignoring it.
Edmonton Journal
rturchansky@thejournal.canwest.com
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