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The UK and China boost their economic and political ties with historic bilateral trade agreements
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Current market concerns over Chinese inflation and monetary tightening seem overdone
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With the Chinese government focusing on domestic economic growth, Hamon's Hugh Simon is bullish on the country's future
Hugh Simon, chief executive officer at Hamon, BNY Mellon's specialist Asian equity investment boutique, looks at the health of the Chinese economy as the Chinese Premier, Wen Jiabao, makes a historic state visit to the UK.
The BNY Mellon Vietnam, India and China (VIC) Fund, managed by Hamon, is now available to UK investors.
Over the weekend, Wen Jiabao arrived in the UK as part of his European tour aimed at building and boosting economic and trade ties within the region. His UK leg of the trip was deemed a relative success as he and UK Prime Minister David Cameron signed historic bilateral trade agreements worth around £1.4 billion.
Driving growth
Such a high profile trip highlights the next stage in China's economic development. As Jiabao explained in The Financial Times last week, the country has adopted its 12th five-year plan, aimed at shifting its development model and focusing on domestic growth, consumption and further internationalisation of its economy. Financial markets have reacted negatively in recent months to high inflation and monetary tightening by the Chinese authorities, but Simon believes that these concerns are overdone. "The market's worries are centred around slightly dampened GDP growth forecasts for later this year - down from 8% to 7% - as a result of more moderate growth on the back of lower inflation. However, the government's foot is firmly on the brake at present, and while we would expect further monetary tightening this year, at some stage the government will be able to take its foot off the brake and let the economy run free," he adds.
"The past few years have seen strong wage inflation in much of China, further boosting domestic growth. Meanwhile, the government's ‘Go West' scheme, consisting of numerous large scale infrastructure projects aimed at promoting the fast and healthy development of much of the country's poorer western areas, continues. By building factories and industrial centres in these areas, the aim is to reduce employment migration and boost local growth," he explains. "As salaries rise, the quality of goods will increase, as will the broad wealth of such areas. In time, we expect to see the major cities of China follow in the footsteps of Hong Kong - shifting from industrial to service centres," Simon says. "Meanwhile, we expect the gradual internationalisation of the renminbi to be a real boost for the economy as it becomes more of a trade currency, enabling manufacturers to effectively transfer inflation risks to external buyers, and boosting the domestic economy."
Building for the future
As part of the 12th five-year plan, 36 million new low cost homes will be built in poorer areas, while new, tightened mortgage regulations will also come into force. "These plans show the domestic stance that the government has taken," says Simon. "Clearly, the message is that China is no longer all about exports. There are market concerns about the cost of putting this infrastructure in place, but this really isn't an issue, it is simply a funding exercise. Once the infrastructure is there, the next step will be to look at social welfare and green issues, although that is still some way from being a priority," he adds.
"Looking more broadly at the region, we continue to see Vietnam and India as emerging markets in the early stages of economic development. With China, they contain half of the world's population, and over half of the world's under-30 population. While South Korea and Taiwan have benefited in recent months from the reconstruction efforts following the natural disasters in Japan, they simply don't have the population growth to benefit from a burgeoning middle class, like India and China do. Simon concludes, "we expect to see those ‘consumption' stocks in China and India remaining strong as the middle classes of the two countries continue to grow."
Hamon Investment Group is based in Hong Kong and specialises in Asian equity investment.
If you want to follow up with Hugh Simon, please email me: karolina.adamkiewicz@bnymellon.com
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