We have been bulls of China. This super competitive economy has become the world’s most powerful exporter. China takes the waiting out of wanting for many Western consumers, by delivering good quality product at affordable prices.
The Chinese authorities have kept the value of their currency down to add competitive edge. Thousands of Chinese migrate from country to town to swell the industrial workforce each month. They are highly motivated. Talent in China tends to gravitate to industry and enterprise, as the media and government machines are still highly centrally controlled and do not value novelty or dissent.
Towards the end of 2008 the Chinese government became alarmed by the severity of the downturn in demand, brought on by the financial crash in their major western markets. Stories circulated in the western media saying Beijing was worried by the social consequences of the sharp downturn and the unemployment that resulted from it. They feared unrest.
As a result the Chinese government embarked on the most massive stimulus programme relative to the size of their economy of any major country. They could afford to. The good years of export success had given China $2 trillion in reserves. An economy used to growing at more than 8% a year has many more options than more mature western economies growing at 1-2%.
The huge stimulus worked. They expanded credit growth, money supply and the public deficit. The government spent more, and the state influenced banks lent more to increase private demand. Within a matter of months asset prices of shares and properties started to surge. We moved from being all in cash for clients, to holding good positions either in China directly or in Asia ex Japan which gave us representation to China.
Recently there have been a couple of important wobbles we need to think about. The first highlighted the extreme fiscal and monetary response they have made. Property prices and general prices have risen, with the danger of too much asset price inflation in particular. As a result the Chinese authorities have demanded the banks hold more capital, and have sent first signals about monetary tightening. Stocks immediately reacted downwards. Markets expect more monetary tightening to come, with higher interest rates in due course.
The second highlighted the Chinese twin system of progressive economic liberalisation allied to central political control in a single party state. Google, an investor in China who had responded to the growing economic freedoms, suddenly pulled out. The company did so in protest at state interference in Chinese people’s email accounts, wanting to limit internet freedom and spy on citizens through their computer use.
Some will argue that these two events suggest Chinese shares have gone high enough. Why not take your profit, where you have one, and turn your back on a country struggling to reassert monetary control after some excess? Should you not recognise the danger of a country that cannot use the full range of the internet and its providers owing to its wish to be authoritarian?
I think it is still premature to take that view. The Chinese authorities are unlikely to tighten so much that they abort their recovery or bring the present boom grinding to a premature halt. Memories of the 2008 recession are still too recent. I would also not put too much money on as large and dynamic population as China’s putting up with censorship of the internet entirely. We are still running our positions in China. In common with our general view, we think 2010 is going to be a less easy year for making money than 2009. We think there is still some scope left from worldwide easy money. China is still going to grow much faster than the western economies, despite the wobbles and bumps on the way. It's not always wrong to be a bull in a china shop.