Despite the country’s softening growth rate, fund managers still have a positive outlook on Chinese equities, with an economic “soft landing” expected this year.
China has been growing very quickly for the past ten years, consistently targeting growth of 8% or higher over that period.
This year marks the first time that the growth target’s been lowered, dropping to 7.5% by the National People’s Congress during its recent annual meeting, in an effort to promote a slower, more sustainable, pace of growth as China rebalances its economy.
The intentional downshift attracted criticism, with some insisting growth needs to remain in the double digits.
“[China has] transitioned from a more export-driven infrastructure and investment model to a more domestic-focused export model, and has put a stronger emphasis on domestic consumption and service,” says Raymond Chan, chief investment officer of Hamon Investment Group, and manager of the Renaissance China Plus Fund. “If China insists on a very high growth rate of even double digits, that won’t be healthy.”
Chan says China’s leadership understands that the quality of growth is more important than the sheer quantity of growth for the next five to ten years.
However, he expects that China will exceed the official 7.5% growth target this year, with his forecast being closer to 8% or 8.5% growth.
This year, China begins a political transition and with new leadership expected to take office in March 2013. Chan expects much of the new policy platform will be put in place and confirmed in the second half of 2012.
This effort will boost growth momentum in the second half of the year, and Chan urges investors to look beyond the temporary effects of the more moderate monetary easing to come.
“Monetary easing in the first half of 2009 offered tremendous easing and liquidity injected into the banking system,” Chan says. “[This time around], monetary easing is much more moderated, and more gradual, because the state of the economy is much better than after the Lehman bankruptcy.”
So far, monetary easing has been quite conventional and gradual, and he expects that three to six months will pass before investors see the full impact on economic growth.
Chan encourages investors to look past the 7.5% target since growth in China will gradually pick up, with the second quarter of 2012 outperforming the first.