Follow the Chinese way to realise investment potential

The Chinese new year has just been celebrated, saying goodbye to the symbol of the tiger and ushering in the rabbit or hare. People born under the new sign are traditionally thought to be gentle, modest and have a strong memory as well as being good communicators.

China is certainly a major player on the world stage these days. It has overtaken Japan to become the world's second largest economy, only outpaced by the US.

Last year, its economy jumped 10.3 per cent, up amazingly by 1.1 per cent on such a successful 2009.

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This points to what fund manager Anthony Bolton of Fidelity China Special Situations calls a "two-speed world". He means that low growth in the developed world (US, UK, Europe and Japan) has a negative impact on exports from emerging economies.

Critics of China point to rising inflation but are heartened by the swift action taken by its government, in part from lessons learnt from Japan.

Stuart Parks, head of Asian Equities at Invesco Perpetual, said: "Loose monetary policy has certainly enabled inflationary pressures to build across Asia", primarily in food prices, but he added, as "China's population is migrating to cities and high levels of savings make home purchases more affordable, there are solid long-term fundamentals underpinning prices."

One of the likely bubbles that could arise from such migration is in property prices. To help the massive demand, the government has announced it will construct 5.8 million units of low-cost houses. Yet skilful fund managers may wish to reduce their exposure to this sector.

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Instead they are likely to focus on firms which will benefit by rising domestic consumption since retail sales are growing at an annual 15 per cent.

Mr Bolton, with an excellent investment track record before starting the new Chinese fund for Fidelity, has focused the majority of the portfolio on consumer discretionary business, such as automobiles, lifestyle goods, hotels, restaurants and other retailers, as well as the service sector (healthcare, financial stocks, internet firms and telecommunications).

Further interest rate rises to take the heat out of the Chinese economy are expected by Andrew Gillan, senior investment manager at Aberdeen Asset Management and manager of Edinburgh Dragon Trust.

The company transparency demanded in developed nations is often lacking in China which concerns cautious savers and yet the Madoff debacle shows how even US investors can be caught out.

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"The Chinese economy should settle down to a healthy medium-term growth rate, albeit with the inevitable cyclicality that any economy is subject to," is the encouraging summary from Mike Gush, manager of Pacific Horizon Investment Trust.

Jonathan Baker of Leeds stockbrokers Charles Stanley likes Aberdeen Chinese Equity (formerly called China Opportunities), which is Singapore managed by respected Hugo Young and his team. He calls it "a conservative choice in a safe pair of hands and less racy than some of the alternatives".

Baker also tips both First State Greater China Growth with 70-80 holdings and Jupiter China, launched four years ago.

There is an underlying political risk. It would be easy for its government to slap a special tax on foreign investors and little savers here could do. Yet this would be "extremely unlikely", according to Dr Julian Thompson, AXA's head of emerging markets, pointing to increased moves to allow the Chinese to invest outside.

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The situation is complicated by China issuing several different classes of shares. Some are virtually only available to Chinese but non-Hong Kong residents and available to foreign investors on a quota basis, trading at a premium. Funds therefore prefer to buy Hong Kong quoted stock with good liquidity.

Mr Parks said: "China may be a communist state in name, but in practice it is somewhat different. Over 50 per cent of total productive capacity is in private hands. Even the large state-owned enterprises compete vigorously against themselves."

Thomson has 17.5 per cent of the AXA Framlington Emerging Markets fund in China and is keen on its banking sector which he says has "under-performed recently and is a good long-term prospect".

According to Lipper research specially prepared for the Yorkshire Post, the top performing funds with at least 50 per cent invested in China over three years were:

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n GAM Star China Equity, up 97.1 per cent (but US dollar denominated);

n Atlantis China Healthcare, up 62.1 per cent;

n Threadneedle Greater China Equities, up 53.8 per cent;

n First State Greater China Growth A, up 44.2 per cent.

Andy Parsons, investment manager at private client stockbrokers The Share Centre, said that Chinese funds appeal to those who accept more risk and appreciate the inflationary pressures there. He particularly likes First State Greater China Growth A but also Gartmore China Opportunities, managed by Charlie Awdry, which has 86.5 per cent in Hong Kong.

Over five years, the star funds were:

n Standard Life IG SICAV China Equities, up 289.3 per cent;

n First State China Growth 1, up 258.7 per cent;

n Allianz RCM China, up 246.6 per cent.

With volatility to be expected in Asian economies, savers should look long term, ideally 10 years.

However, there have been some spectacular results over just one year, such as First State Greater China Growth fund achieving 24 per cent.

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Neptune China is tipped by Martin Payne, Leeds director at brokers Brewin Dolphin. The fund has attracted 105m and is mainly invested in Chinese-listed companies which can invest outside China.

He also likes JP Morgan Chinese Investment Trust, which was the first to invest solely in 'Greater China' (China, Hong Kong and Taiwan).

Launched in 1993, it trades at a two per cent discount to net asset value and has a competitive one per cent management fee. It has returned an impressive 240 per cent over 10 years.

During President Hu Jintao's visit to the US last month, an export deal worth US$45bn was announced. The second announcement – on US technology – may prove of major advantage to China as it will soon duplicate and dispense with American suppliers.

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In the eurozone and US, China has been a major purchaser of bonds, expecting to have arms export restrictions lifted in return, which virtually only the UK has opposed.

Later this year China will announce the details of its 12th five-year plan.

It will seek to change the structure of its economy by focusing on three themes: promoting domestic consumption, promoting new strategic industries and services, and regional development.

The investor who finds a share or fund that will benefit from such areas is likely to be well rewarded.

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