China still offers long-term opportunity, says Mobius

(July 22, 2004) Despite the recent slowdown in the Chinese economy, the country remains attractive as a long-term growth opportunity, according to Dr. Mark Mobius, speaking today at the annual Franklin Templeton Outlook & Opportunities Forum in Toronto.

“China’s unprecedented growth has led to new investment opportunities, in both the young urbanized internal economy and the well-established export economy,” says Mobius, lead manager of the Templeton China Tax Class fund. “In the long term, China will prove to be a dynamic investing opportunity.”

There has been some fear that China could turn into the next stock market fiasco, bursting in the same spectacular fashion as the dot-com bubble. Mobius says that fear should be set aside, as the stock markets have already corrected in response to government moves to cool down growth.

“There was a lot of undue optimism about China, not only outside China, but inside,” he says. “We saw the A-share market booming, then there was a crash. Now people are a lot more sober, so I don’t think we can see a big crash.”

In fact, much of the seemingly negative news coming out of China could be seen in a positive light. For example, the country has recently slipped into a trade deficit after decades of surplus, but a large part of this is due to increased imports of high-end luxury items.

Economic growth has slowed considerably, but this is due to the government applying the brakes to staunch what was viewed as an overheating economy. The strong control held by the government allowed it to dictate that banks stop making loans to certain sectors of the economy, such as high-end housing.

“A lot of people question whether the growth statistics the Chinese government hands out are accurate,” he says. “The best way to check that is to see how much electric consumption takes place in the country, because electric power consumption is closely related to economic growth.”

A comparison chart shows official GDP growth does track with power consumption, verifying the government’s information.

The strong role of the central government also helps to combat one of the problems typical of emerging markets — corporate governance. Of course, North America has proven that more developed economies have little claim to the moral high ground on this topic, but emerging markets carry the stigma all the same.

“Corporate governance in Taiwan has improved dramatically,” says Mobius, whose fund invests in what he calls the “greater China area,” including Hong Kong and Taiwan. “The government has established an organization that has the funds to hire lawyers to work for minority investors and launch class actions against companies that violate shareholder rights.”

In mainland China, most of the strongest companies are still at least partially state-owned — the so-called “red chips.” This introduces an extra level of governance.

“You’ve got the state auditor watching, you’ve got us watching and you’ve got Chinese domestic investors watching,” he says. “As a result of a number of scandals and lawsuits in the China A-share market, the Chinese have become much more aware of corporate governance and that’s good for us.”

The biggest threat to the Chinese economy remains its reliance on overseas suppliers for most raw materials. Coal is one of the few key economic ingredients found in China, so the country must import iron and cotton to fuel its important manufacturing and garment industries.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com