Most of the investment public will have heard many debates around China and its economy over the past decade. The debate can take many forms and will differ depending on who one speaks to. In the end the broad truth is that the Chinese economy is exceptionally hard to understand. It is a command driven economy that has many levers and much interference from central government.
It is hard for many Western people to understand this concept as most of the Western economies are open and transparent. Of late the main noticeable feature would have been the stellar performance of many Chinese exposed shares in the global index. Most investors would have heard of Alibaba but other names such as Baidu and Yum China would probably be less well known.
Within the fund we own, or have owned, both these companies and they have performed well thus far. The question then comes about how much good news is baked in to many Chinese exposed shares. We have taken the view that we are positive longer term on the Chinese consumer as it is exposed to an area that is in many ways untapped. As a country becomes more economically mature it is normal for the population to start to demand more complex goods and services and goods traditionally seen as non necessities.
Although longer term, this is a strong secular trend and addressable market, we have to acknowledge that the Chinese economy is not at all without risks. Some of these are known such as the very high levels of debt, the speculative property and stock markets and corporate governance that is sometimes questionable. As can be seen from the graph below the debt levels are very elevated and it is something that has been acknowledged by the central government. If the government is able to manage their way out of this only time will tell.
From an investment perspective the main thing we try to look at is, owning companies that have “on the ground” knowledge within China and ones that have a proven business model that we feel we can understand. Baidu is a good example of this, as it is the predominant search engine in China that has a 70% market share. China is still an under-penetrated market in terms of internet access and consumers are favouring this medium more and more for purchases.
Total debt to GDP is 42 percentage points above trend
Figure 1. Total debt to GDP is 42 percentage points above trend

Longer term therefore one must always be cognisant of the risks and dangers inherent in any market and more so with any emerging market. However in a world that seems like it is rapidly deflating we feel there are still relatively attractive opportunities in markets that still show attractive growth and inflation dynamics.