The prospects for China as a continuing engine for economic growth
21 November 2008
This week, while in Asia, I had the opportunity to meet with Archie Tsim, Chief Financial Officer of the Hong Kong Stock Exchange. With New Zealand’s economic growth becoming increasingly dependent on the strength of our relationships within Asia, our discussion was centred on the prospects for China as a continuing engine for economic growth in the region, despite the current global uncertainty.
By way of background, the Hong Kong Stock Exchange is the third largest in Asia in terms of market capitalisation (behind Tokyo and Shanghai) and has daily turnover of around HK$260 billion. Unlike other major sharemarkets such as the London Stock Exchange, or the New York Stock Exchange, where 90% of transactions are undertaken by institutional investors, in Hong Kong, 30% of the market turnover is driven by retail investors - (in the Shanghai sharemarket , the equivalent figure is as high as 80%!)
A higher concentration of retail investors causes higher market volatility (as we’ve seen in the sharp market movements in both Hong Kong and Shanghai in recent months) but also means that both markets are very liquid and tradeable, and widely accessible.
Archie provided an insightful view on the Chinese economy and financial markets of the region.
He noted that 60% of the Chinese economy is still based on agriculture, and despite the rapid economic growth that China has been experiencing, it’s still around 30 years behind the US in terms of its development. He noted that while mainland Chinese have around US$3 trillion saved in the banking system, there is only around US$40 billion of savings invested in the Chinese sharemarket – not as much as many people might ordinarily believe!
And he estimates that there are between 20,000 and 30,000 mainland Chinese companies “in the pipe-line” to raise capital from the sharemarket, including a number of large Chinese based IPOs (“initial public offers”) possible in the future, covering the banking and utilities sectors. At worst, he believed a slow-down in growth of 2% to 3% would not be material to the Chinese economy overall, or the continued growth of the emerging middle class in that country.
On balance, his view was of an environment of still considerable untapped potential and future growth – the scale is of the opportunity is large. And having concluded our meeting, I must say that I generally agreed with his opinion.
As New Zealanders our wealth growth and preservation is largely reliant on our ability to understand and interact with the economies of our immediate region, and the wider globe. In the current environment where there are many reasons to feel discouraged by the prospects for our financial objectives to be realised, I’m encouraged by the opportunities, which in my view, continue to be available to prudent and calculating investors.
At Spicers, our investment team is charged with remaining detached from the short-term mood, and remaining focused on our longer-term objectives. Both now and in the future, China will continue to be an important consideration in achieving our financial goals.
If you have any questions around this article, please contact us at any time.
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