Mobius Bullish on the Year of the Ox

On 26 January, China celebrated the start of the Year of the Ox. However, I would prefer to call it the Year of the Bull because I expect 2009 will be the year that emerging stock markets witness a substantial recovery, with China leading the way.

		Positive prospects for China
		Inflation declines
		Currency undervalued
		Exports rebound
		Government stimulus
		Risks remain
		Summary
		Important Information

Positive prospects for China

I believe that the investment prospects and long-term outlook for China look good; while it may not achieve the double digit growth of 2008, I think it can certainly achieve high single-digit growth, for a number of reasons:

• China's leadership is intelligent, resourceful and enlightened with an interest in maintaining growth.

They have the organisational skills and policies capable of ensuring that GDP continues at the highest growth level of any major country in the world.

China has one of the healthiest banking systems and individuals with high levels of savings.

They have the financial resources to undertake this recovery with the world's largest store of foreign reserves.

The government is undertaking a number of massive stimulation programmes targeted at the domestic market.

Inflation declines

Strong declines in inflation have led policy makers to become more confident and cut interest rates aggressively. Since 15 September 2008, the People's Bank of China has cut lending interest rates by 216 basis points with additional cuts expected.

To stimulate bank lending, reserve requirement ratios for banks were lowered four times and loan quotas, which were designed to restrain banks from lending, will probably be abandoned.

Currency undervalued

The Chinese currency is currently undervalued, and there is pressure for it to strengthen against the US dollar. However, the Chinese are concerned with further erosion of export businesses and are proceeding cautiously regarding any further appreciation. With the renminbi taking a bigger role in the international market, it could become another reserve currency along with the US dollar and euro.

Exports rebound

New export orders have rebounded. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact and the current 2009 GDP growth forecast for China is 8%¹. The slowdown in China's industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows.

Government stimulus

In November 2008, a stimulus package was announced of up to renminbi 4 trillion (or US$586 billion) to be spent in 10 key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support.

Local governments will also be spending as a result of Beijing's measures to ease restrictions on municipal bond issuance. China's budget law prohibits local governments from issuing bonds but the latest indications are that Beijing is now reviewing this issue. Another likely way to get around the rule is to encourage local government-owned investment corporations to issue debt to finance infrastructure investment.

Risks remain

There are, of course, risks to consider when investing in China. Unemployment is on the rise and labour activism is increasing there are risks of disruptions which could impact stock prices. Employment has dropped to a record low, indicating stress in the job market. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%.

Summary

In our view, however, the benefits far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population; clearly China must be an investment destination that all long-term investors give serious consideration to for their clients' portfolios.

I personally believe China has better prospects of recovering and returns (stock market) than India... but I could always be proved wrong!