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Investing in China

Having had his reservations about China for some time, Danske Invest's chief analyst, Bo Bejstrup Christensen now takes a more upbeat view on investing in the country. However, caution is crucial when investing in China, he says.

After some difficult years, Chinese equities are again becoming attractive. Analysts and economists have for some time voiced concern about the slowing growth rates in the People's Republic, but Danske Invest's chief analyst, Bo Bejstrup Christensen, believes that the economy is bottoming out and that growth will stabilise at about 6%. This makes for good investment opportunities in the Chinese equity market, but Mr Christensen emphasises that China is a complex market, and you have to be able to navigate between sectors and industries in order to optimise your investments. He has five points of advice to investors considering putting their savings to work in China.

Avoid banks and state-owned companies
Investing broadly in Chinese equity indices means you will automatically buy into a number of Chinese banks and state-controlled businesses. Mr Christensen advises caution.

“Many of the state-controlled companies act as an auxiliary of the State, and the banks will encounter a period of increased losses and concern about the quality of their lending on the back of recent years' excessive lending growth, so you really have to be careful here,” he says.

Growing focus on renewable energy
For quite a number of years,  construction and industry have been the drivers of economic growth in China, leading to mass pollution. According to Mr Christensen, that presents an opportunity for companies focusing on renewable energy.

“Pollution is an acute problem in China and something that urgently needs to be addressed. Officials have indicated that, in future, growth should derive from non-polluting sources, and that makes renewables attractive. It will be a major factor both in the near future and longer term,” he says.

The internet is booming in China
The growing Chinese middle classes have whole-heartedly embraced the internet , and online retailing giant Alibaba's IPO drew big headlines. This shows the huge potential of the internet.

“The Chinese growth story is truly exceptional. Many Chinese have in effect skipped a step in the retail revolution, side-stepping physical stores and moving directly to buying goods online. In other words, things are moving very fast, and that creates new opportunities,” explains Mr Christensen.

Keep an eye on reforms
The new Chinese leadership was elected in 2012 and has since launched extensive reforms. This means that investors should pay attention to news and announcements from the Chinese authorities.

“China is basically still a developing country, which implies a huge potential for growth and attractive investment returns. Very often, however, it takes reforms to make this potential crystallise. The new leadership has sent surprisingly positive signals on that front, and we expect it to be an investment theme for quite some time to come,” says Mr Christensen.

Find a good fund manager
The Chinese market is not that attractive from a general point of view, considering the concentration of, for example, banks in the broad indices. That makes it all the more important to identify the right niches of the market that offer the best returns. This is a difficult exercise, and Mr Christensen recommends investors to find a good fund manager.

“Our best advice is to find a fund manager who really knows the Chinese market and who dares to deviate from the benchmark. Achieving attractive returns on your investments is not easy, but with in-depth knowledge of the Chinese market, you can make a decent profit there,” says Mr Christensen.

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