The second largest economy in the world, China looks set to continue on the upward trend.
While the numbers are never quite certain, there is no doubt China is definitely still growing. The middle class in the country is booming and the economy has slowly reduced its reliance on exports and adopted more of a focus on domestics.
It sits second only to the US in terms of GDP, and according to data from the US Department of Agriculture, China looks set to continue and will grow to more than twice its size today by 2030, closing the gap with the US. By then annual growth in GDP is projected to stand at ¢24.8tn (£16.3tn) in the US and $22.2tn (£14.5tn) in China. But despite the outlook, challenges still remain. For example, the country’s demographics show a low population growth and ageing population due to its “one-child policy” over the past 30 years.
Slow growth
China’s economy expanded by 7 per cent in the first quarter of this year, and although that was in line with expectations, growth was still slightly slower than the 7.3 per cent recorded in the final quarter of in 2014. Nominal growth fell below real growth – the first time since 2009 – slowing to 5.8 per cent year-on-year from 7.7 per cent before.
Its economy expanded 7.4 per cent in 2014, the slowest pace for 24 years, and the first time it has undershot the government’s target since 1998. The People’s Bank of China (PBOC) has cut interest rates multiple times due to concerns over the 7 per cent GDP target being at risk.
Industrial production fell to a 15-year low of 5.6 per cent, and retail sales were at a nine-year low of 10.2 per cent.
But despite a slight recent slowdown in the economy, China funds are still performing well. Some of the top performing funds of the past 12 months have been China funds, taking over from India-focused funds which held the top spots during the majority of 2014.
Data results
According to data from Bank of America Merrill Lynch, China funds saw their biggest weekly inflows since April 2008 – $4.5bn (£2.9bn) in the week ending 27 May.
Table 1 shows the top 10 performing China unit trusts from the Investment Association (IA) China/Greater China sector and investment trusts with more than 50 per cent allocation to China. The top performing unit trust, the Threadneedle China Opportunities fund, saw a return of £1,816 based on an initial £1,000 investment over five years – and over three years it saw a return of £1,892. The £159.5m fund, managed by Vanessa Donegan and Natasha Ebtehadj, only invests in China – it currently holds 1 per cent in cash – and its largest sector weighting, illustrated in Chart 1, is in financials. Its largest holding is 9.9 per cent in Tencent Holdings, an investment holding company with subsidiaries that provide media, entertainment, internet and mobile phone services. Its second largest holding is in China Mobile, the largest mobile telecommunications company by market cap globally.
The second best performer over five years is the top performer over 12 months in the China/Greater China sector and the fifth best performer over all IA funds. The Ireland-domiciled Neuberger Berman China Equity fund has a mid- to large-cap focus and invests in Chinese companies listed in Hong Kong, overseas and domestic Chinese markets. The $932.2m (£612.6m) fund has its top holding in Ping An Insurance, which is also a holding company whose subsidiaries deal with insurance, banking and other financial services.
Investment trusts
There are far fewer investment trusts available to investors looking at China. Just three funds have more than a 50 per cent allocation to China (including Hong Kong) stocks. The Pacific Alliance China Land trust is the top performing trust, returning £2,232 over five years. It is a real estate fund which is focused on investing in properties, new developments, distressed projects and real estate companies in the Greater China area. According to FE data, the $244.6m (£160.7m) fund holds 79 per cent in property.
While there is still a mild slowdown in the Chinese economy, fund performance seems to be bucking the trend and it looks as if the leading Bric country is set to continue on an upward trajectory for many years.
Five questions to ask...
1. What currency is the fund denominated in? Check the currency the fund uses, because while it may not have much of an impact on cost, investing in a dollar or sterling-denominated fund could mitigate some currency risk if it uses renminbi, for example. Many funds will be available in different currencies.
2. Does it invest in stocks listed in Hong Kong or domestic markets? Check where the fund allocates to. Some funds may call themselves China funds but may not invest in domestic markets, meaning there is less risk. But if the fund purely invests in the domestic markets and not Hong Kong, check its risk rating and whether or not it is a suitable investment.
3. What type of shares does the fund invest in? As above, there are different types of shares. It has not historically been easy to access China A Shares because they are generally only available for purchase by mainland citizens. But increasingly more funds are now gaining access to the A Share market. It should be noted that B Shares are quoted in foreign currencies such as the dollar and are open to both domestic and foreign investments.
4. How much risk is involved? As with investing in any overseas country, there is an element of unknown risk. China funds will typically carry more risk than a UK fund. Look into the strategy and also read the key investor information document to make sure what the risk/reward profile will be.
5. Does it allocate to other countries? Many funds will allow investment in other countries. The IA stipulates funds within the China sector must have 80 per cent in Chinese equities, leaving a further 20 per cent for any other investment. Check which other countries it can or does invest in.
