The golden dragon
After twenty years of rapid growth averaging 9.5% a year, the Chinese economy continues to boom. According to the International Monetary Fund (IMF) this year China is set to become the biggest contributor to global economic growth.
In July, the IMF raised its 2007 economic growth forecast for China to 11.2%, up from 10%, and estimated growth in 2008 to be 10.5%. This is three times that in Australia and the US, where economic growth is forecast to be about 3-4%, and 2-4% respectively.
The catalyst for this kind of growth in China is rapid industrial expansion. With more and more Chinese people moving into cities, building homes and buying new technologies such as cars, IT and mobile phones, it’s no wonder the world’s most populous country is growing at such a rapid rate. And the Government is encouraging this growth by opening up the economy, encouraging education and paving the way for investments in technology and modern infrastructure, making it easier to do business in China than ever before.
So imagine the affect this kind of expansion has on world economies and prosperity, especially the commodities sector. For example, China is currently urbanising 300 million people, building cities, roads and buildings. The resulting demand for steel, copper, zinc, cement and a host of other commodities is huge. This also applies to the growing number of people driving cars - increasing the demand for steel, aluminium and of course oil. So you begin to see how China’s economic growth has a knock-on affect for world economies.
Aussie Aussie Aussie
With a strong array of commodity exports, the Australian economy in particular is benefiting from China’s expansion. With a small population and a large land mass full of natural resources, we are the perfect trading partner for China. Coal, iron ore and bauxite (the raw material for aluminium) are some of our biggest exports, and with such high demand for these commodities in China prices have been soaring. This has a positive effect on the entire economy.
Sharing the wealth
Not surprisingly, China’s sharemarket is booming, with millions of investors looking to benefit from China’s industrialisation. And the country’s economy is predicted to continue growing strongly for at least another 20 years with plenty of opportunities for investors. However some analysts have warned that like with the tech bubble many of China’s shares are now overvalued and should be avoided. While many others are risky and volatile, with China’s financial reporting standards lower than in Australia. Another problem is that the Chinese domestic A-share market is extremely limited, with most people gaining exposure through the Hong Kong stock exchange.
For all these reasons, some analysts advise gaining access to the Chinese growth story through methods other than investing directly in the Chinese share market. Luckily, there are easier ways to take advantage through managed funds or buying shares in Australian companies that benefit from China’s strong economy. Buying shares in Australian resources companies like BHP Billiton and Rio Tinto or investing in a similar managed fund, can also be quite tax effective.
While investing in an emerging markets funds can also give you access to other growing economies such as India, Russia and Brazil. These funds often have high growth but are also quite volatile and risky. Investing in a general global share fund will also give you some exposure to China and is a much more diversified approach.
There are many benefits of accessing China through a managed fund rather than through shares - you have an expert choosing shares for you, you can access more companies with less money and your investment is much more diversified. But remember some of these funds can be still be quite volatile and high-risk so it’s best to seek advice before investing. Your financial adviser can assess your personal situation and make sure your investment portfolio is well-diversified and in line with your long-term goals.