China's investment opportunities and risks(27/10/2013)

China had become more and more influencing in global economics through her announcement of fiscal policy, 5-year plan or even the corporate earnings reports. People around the world started to put an eye on the development of China and admitted its position as the second large economic unit in the world. The Chinese government started to open its market to the world step by step. The RMB Exchange Rate Regime Reform in 2005, the increase in the amounts of RMB Qualified Foreign Institutional Investors (RQFII) and Qualified Foreign Institutional Investor (QFII), and the launch of Shanghai pilot free trade zone, all of these raised the degree of openness of RMB assets to foreign investors.

Though many people try to make profit by investing in the China’s equity market, however, the majority are disappointed by the poor performance these years. There is no doubt that China is still under drastic development and possesses a huge upside potential. But bear in mind that before stepping into any emerging countries, you have to concern about the risks pairing with the investment opportunities.

SLOWER GDP GROWTH

In the view of macroeconomics, the Gross domestic product (GDP) of China is reaching a new high every financial year, which was compatible with its condition as a developing country.

Chart 1: The total GDP and GDP growth of China

Source: National bureau of Statistics of China

Data as of 22/02/2013

In Chart 1, however, the GDP growth rate was under a downtrend since 2010 and dropped to 7.8% in 2012. It was lower than the forecast of 8% GDP growth for 2012.

Moreover, the GDP growth target had been lowered from 7.5% (11^th 5-year plan) to 7% (12^th 5-year plan) for 2011 to 2015. It showed that the China government also agreed that the economics growth cannot be sustained at a high level forever. Nonetheless, the growth of China was still indispensable.

INTERNATIONAL TRADE SURPLUS VS APPRECIATION

Although the labor cost of China was increasing from time to time, it was still relatively low comparing with the other developing countries such as India. Thus, the products from China were more cost-competitive and Chart 2 shows that China was enjoying a trade surplus in 2013. This situation existed decades ago and it is believed that it will continue in the future.

Chart 2: Export, Import and trade surplus of China for the year 2013

Source: National bureau of Statistics of China

Data as of 15/10/2013

Although China adopted a monetary policy that protected RMB from the attack of foreign capital by holding large amount of foreign reserve and limiting the openness of RMB, the continuous trade surplus had provided an enormous pressure on the appreciation of RMB. In chart 3, we can find out that right after the RMB Exchange Rate Regime Reform in 2005, the RMB started to appreciate drastically until 2007. From the middle of 2010, RMB appreciated steadily towards the day high of 6.082 (USD/CNY) in 2013. The appreciation seemed to be continued in long term and it would somehow hurt the export of China and worsen the China economy. Investors and exporters should hedge against the currency risks. Leaving the risk exploit would probably bring huge loss to their investment.

Chart 3: Trend of USD/CNY from 2005 - 2013

Did it mean that the appreciation bring no benefit to investor in China? The answer was definitely NOT! Assets such as cash, properties, stocks and bonds which were settled and accounted in RMB would enjoy the appreciation in their values with the RMB. For example, one who owned the RMB term deposit would be benefited from both the interest incurred and the appreciation in the currency. Made your investment decision wisely which you could turn a risk into profit.

RENEWABLE RESOURCES AND GREEN PRODUCTS

Despite the rapid growth of China, she had become the largest polluter in the world. Air pollution index in Beijing was always extremely high. There was only about 50 meters of vision in some serious cases. Heavy metal pollutants from industries also polluted the water and harmed the life of citizens. Pollution would hurt the productivity of workers and thus the GDP of a region. We needed to put an eye on the policy of China government towards pollution problem. If they will not do any intervention, the snowball effect must be triggered and definitely a risk for investors. Nevertheless, the China government was acknowledged the seriousness of the problem and raised a few policies and solutions in the 12^th five year plan such as the subsidies of renewable energy resources, pursued the use of environmental product and educated people about recycling. These gave a great opportunity for those green energy industry and environmental industry in the foreseeable future.

Counterfeit and unethical goods

Greater China was infamous for her counterfeit products. In every category of goods, it was not hard to find a counterfeit from the famous foreign brands. It had been a big problem for those foreign producers for many years. They had given hard pressure to the Chinese Government to handle the issues of counterfeit. Yet, some foreign countries may try to boycott products from China in the future which would harm the China manufacturing industry. Moreover, China’s tourism and manufacturing industry were also threatened by the unscrupulous manufacturers who were producing harmful and toxic food. If these problems didn’t rectify as soon as possible, it would be too risky to invest or even live in a country that makes up of low quality food and products.

Opportunities with risks

While opportunity is invulnerable to be pair up with risk, no matter how you manage your own portfolio, it is hard to make one with zero risk. Currently, the China market is full of risks. If you make thorough investment planning and appropriate research, these risks may one day turning to be your opportunities. Giving the undetermined potential of its market in the future, the Great China is always profitable and worthy to invest.