China: A World-Class Act (Mobius)

This article is a guest contribution by Mark Mobius, Vice-chairman, Franklin Templeton Investments.

I attended a Franklin Templeton client conference in Vietnam in August and had the opportunity to meet a special guest speaker for the event, Li Cunxin, the author of the book Mao’s Last Dancer. Li grew up in China during the Cultural Revolution where he and his family had to endure poverty and hardships, getting by with having dried yams for each meal. He was lucky to be selected from thousands of children to join Mao’s wife’s ballet group.  Again he had to undergo tough training but emerged as a lead dancer, and then with phenomenal success as a principal dancer on the world stage. Now he lives in Australia with his Australian wife and children.  Since retiring from dancing, he has become a stock broker and an international motivational speaker.

Li’s success is reflective of China’s rise as an economic heavyweight. The country recently became the world’s second largest economy and is projected to overtake the U.S. as the largest economy in the world as early as 2030, if current growth trends continue.[1]

I have been living in Hong Kong since the 1960s and, like Li, have witnessed the tremendous changes in the daily lives of people in China. Today, millions of Chinese have refrigerators, washing machines, mobile phones and other electronic appliances in their households – unheard of during the years of the Cultural Revolution. And the nation of bicycle-riders has turned into one of fervent car owners, with more than 1.2 million cars sold in China every month, surpassing U.S. domestic car sales.[2]

I continue to believe the investment prospects and long-term outlook for China are excellent for a number of reasons. In my opinion, the reason for China’s economic success is really because of the Chinese people: (1) Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese; (2) that leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world; (3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves; (4) China has one of the healthiest banking systems in the world, where most individuals have little borrowings; and (5) investments in infrastructure continue to boom, contributing to future competitiveness.

As China celebrates the founding of the People’s Republic of China (PRC) on October 1, investors continue to be concerned about overheating in select sectors, greater inflationary pressures and a widening wealth gap in the country. I do not believe the Chinese real estate market is in dangerous bubble territory, for a number of reasons I discussed in an earlier blog. In summary, the Chinese property market is deep and varied, average household leverage is substantially lower than that in the U.S., and the government has been quick to act to prevent bubbles. In terms of inflation, while consumer price inflation continues to rise, producer price inflation has begun to subside, declining from a year-to-date high of 7.1% year-over-year in May to 4.3% year-over-year in August.[3] The recent move to increase the flexibility of the renminbi, allowing for a slight appreciation, is another tool that the central bank can use to control inflation.

The widening wealth gap is a common social problem in various countries and is not unique to China. For example, based on the GINI Coefficient which measures income equality, China is on par with the U.S.[4] The Chinese government has been trying to spread the economic benefits to the non-coastal regions by developing inland cities and investing in infrastructure.

There will always be challenges on the path to prosperity, but nothing seems insurmountable to the Chinese people, who are determined that their country regain its past glory and its place on the world stage.

[2] Source: China Association of Automobile Manufacturers, as of Jun 30, 2010.

[3] Source: China Economic Information Net, as of Aug 31, 2010.

[4] Source: GINI Coefficient World CIA Report, CIA World Factbook, July 2009.

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