Morningstar Advisor - December/January 2012 - (Page 46)

Spotlight China Strong Long Term By Sunny Ng Fund managers give mixed reviews on China’s short-term prospects but say problems are surmountable. It’s amazing how much things have changed. To be sure, the days of believing that China’s robust economic growth and rock-solid fiscal position could bail out the economies in the West are clearly over. Morningstar equity analyst Daniel Rohr tackled the big picture of the problems associated with China’s economic imbalances (Page 34). Runaway inflation, a looming real estate and credit bubble, the shadow banking system, and rapidly declining exports are just some of the problems we think might plague the Chinese economy. cities. Affordability, as measured by price to income, is five times the international average. Shadow Banking System most part optimism still prevails. Are we missing something or is this wishful thinking on their parts? As a global organization, Morningstar has more than 100 fund analysts on the ground in North America, Europe, Australia, and Asia. They speak to thousands of investment managers about their strategies and views on the global economy. In many cases, the conversations turn to China. Although there is little consensus on China’s prospects in the short term, on the whole, managers are still relatively bullish about China’s long-term prospects. Here is a sampling of what the world’s fund managers are saying about China. Philip Ehrmann, manager of Jupiter China and Jupiter China Sustainable Growth Headwinds Scarier terms have rarely been associated with a single country: Runaway Inflation In an effort to curb inflation and rein in credit, the People’s Bank of China has raised reserve requirements seven times since January 2010 and imposed a quota on new lending by the banks (CNY 7.5 trillion; $1.18 trillion). These policies have limited regulated lending to all but the largest and most creditworthy companies. They’ve also created a host of unregulated lenders reportedly charging exorbitant rates up to 5% per month to smaller companies looking for credit. Some estimate the size of the shadow banking industry to be CNY 15 trillion ($2.4 trillion). Declining Exports Inflation for August remained stubbornly higher than the targeted 4% for the year, coming in at 6.1%. The inflation rate has been on an upward trajectory since 2010. In particular, there is a fear that a vicious cycle of wages chasing prices and prices chasing wages will push prices ever higher. Property Bubble The most obvious threat to the Chinese economy are declining exports fueled by the poor economic climate in Europe and the United States, wage inflation in China, and the upward pressure on the yuan (albeit only slightly because of strict government currency and capital controls). What Fund Managers Are Saying On the other hand, if you talk to business owners, residents and even the majority of investors in the region, you will find that for the Driven by the rapidly growing middle class and population urbanization, Chinese property prices have risen by more than 140% since 2007 and as much as 800% in some major Ehrmann says that many of these threats are exaggerated and that markets have priced in “the bleakest economic conditions.” He says that current inflation is high but that China will likely see the rate fall back toward the 3% to 4% range over the balance of the year. Food prices will fall in response to good harvests, while industrial inputs and energy prices will also trail off as overall global demand drops. As for the shadow banking system, Ehrmann admits that its size is unknown, but he says that the situation is starkly different than the credit bubble in the United States and Europe. 46 Morningstar Advisor December/January 2012

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012