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How to win gold in China

FEATURE: Fund managers see the Olympics as a small but positive chapter in China's growth story. Moira O'Neill finds out which funds, investment trusts and ETFs offer the best exposure.
August 6, 2008

Investors in China funds have been suffering in the past year but, with the long-anticipated Beijing Olympic Games opening this week, could this be the starting gun for a period of growth, or will we see some post-Olympic blues?

The Association of Investment Companies (AIC) has looked at the impact of the Olympiad on the Chinese economy by collating the views of investment company managers with holdings in China. In general, these managers are positive about the future of China, believing that the Olympics will promote the country and its economy in an good light. Moreover, they believe that China is set to be the world's economic power house for decades to come.

John Millar, manager of Martin Currie Pacific, explains the background: "The Olympic games have provided a major economic boost to the Beijing region. The 2008 Olympics represents the second largest public works project ever undertaken in China. Beijing has spent $34bn (£17bn) to build the Olympic village, improve its transportation and telecommunication infrastructure, restore historic heritage sites and create a cleaner environment."

Amid concerns that China's Chinese economic growth will slow down once the Games are over, Pinakin Patel, Pacific client portfolio manager at JP Morgan Asset Management, puts the Olympic spending into proportion: "The spending on the games amounts to less than 2.5 per cent of China's fixed asset investment in any one year." He also believes that the Olympics will greatly benefit the city of Beijing and its future growth plans. Of the $34bn spent on the games, $26bn has been spent on infrastructure for the city itself.

One part of the story

The consensus from China fund managers is that the Olympics are just a small step in the wider transition of China's economy. The games can be seen simply as an opportunity for the Chinese to show the world how much they have developed. Mr Millar says: "As we saw with South Korea in 1988, such an event can have a major impact on the international perceptions of a country. As an investor, I believe the Olympics will be more a symbol of national pride than a genuine watershed for the Chinese economy."

The games in themselves are not a significant factor behind investors' interest in the country, according to Peter Hames, manager of Edinburgh Dragon trust. Instead, it is the phenomenal growth the economy has achieved, expanding at about 9 per cent a year over the past decade, and its future potential.

Inflation under control

There have been fears that this growth could slow, but Resolution Asset Management believes China's economy will slow less sharply than many commentators believe and will still boast double-digit growth following the Olympics. "China is unique in that its inflation is coming down while the rest of the world is seeing big rises," says Diamond Lee, manager of the Resolution Asset Pacific Growth fund. "China's inflation cycle is simply different to the rest of the world."

Mr Lee believes that, although private sector investment in China will tail off in the second half of the year due to corporate margin squeeze, economic growth will only slow to around 10-12 per cent. Some commentators have suggested the growth rate could plunge as far as 7 per cent.

As with any emerging economy, there are risks. Charlie Awdry, manager of the Gartmore China Opportunities fund, says: "China faces challenges in 2008, including the slowing of Western economies, rising food and energy costs, and the effects of three major natural disasters. However, we anticipate that investment will remain strong, driven by the start of a new five-year investment cycle, and the regional loosening of lending conditions following May's earthquake in Sichuan province."

Consider that the path to becoming the largest economy in the world is hardly likely to run smooth, and China still seems a good long-term bet. Mr Hames says: "While China's economy has slowed recently due to the credit crunch, it will be a key driver for global growth for decades to come."