Why China’s headed for growth

Things are looking up for the Chinese economy.

So finds Kenrick Leung, director of investment for Greater China Equities at Amundi in Hong Kong. He manages the Renaissance China Plus Fund.

Consider that the last government of China established a decade-long bull market through the continuation of economic reforms introduced in the late 1980s and the 1990s, he adds.

At that time, the region’s market system was extended and officials recognized China had to catch up with the rest of the world through increased investment in technology, education and skills training.

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And now, “we’re on the cusp of that [growth],” says Leung, who notes the main roadblock today is the country’s facing challenges on the path to further reform.

“The previous leadership [also went] straight for broke for growth, so the current leadership has no choice but to focus on reforms.” This includes environmental and financial reforms.

Most importantly, says Leung, China needs to focus on cleaning house before the internationalization of the renminbi, the official currency of the People’s Republic of China.

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On the upside, he adds, “We’ve been pleasantly surprised over the last year…since the new leadership has taken up the reins [and] done more than people expected in terms of the reform of state-owned enterprises,” which are businesses owned by the government.

Currently, the government’s focused on finding ways to restructure a lot of highly inefficient enterprises. While doing this, however, it “needs to [ensure] there’s no collateral damage with the banking system.”

So far, says Leung, China’s on track to rebalance its economy since it’s starting to develop a culture of consumerism. As well, “on the fixed-asset investment side and on the manufacturing side, China’s trying to move up the value curve.”

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External growth drivers

Internal domestic drivers in China are weak. But external drivers are helping boost its economy and market.

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“The external environment in the U.S. and Europe is slightly better than two years ago,” says Leung. As a result, the Chinese government hasn’t had to prop up the economy as much through providing liquidity.

Another trend he’s noticed is China’s population is aging, which means fewer young workers are looking for employment. As such, officials can focus less on providing more jobs and on increasing growth through production.

That was the focus of the last decade and a half, says Leung, so there was a lot of excess capacity of commodities such as steel and cement. Many provinces still need to employ people and build up capacity, but others can scale back.

“The government understands it’s not all about growth,” he concludes. It’s also about the quality of growth, and about finding ways to sustain expansion and strong markets.

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