Ben Yearsley: Why I'm sold on China's compelling growth story

The Analyst

I have to admit to feeling rather sceptical of the Chinese growth story in recent times. While the long-term investment prospects remain excellent, I was unsure as to whether it had been over-hyped in the short term – and whether rapid economic growth actually means good returns for investors. A recent visit to Hong Kong with Neptune Investment Management therefore came at an opportune time to re-evaluate my views.

One of the key themes in China's latest five-year plan is to create a harmonious society. This may seem an obvious ambition, but to achieve it involves a massive shift in Chinese attitudes, beginning with wage inflation. Currently there is a huge disparity between incomes in the industrial east of China and the more rural west. The dramatic difference in living standards between the two areas has prompted officials in Beijing to dispatch trade unionists to the west to help ensure they are getting a better deal.

The result is wage inflation which, coupled with rising commodity prices, eventually translates to core inflation – or rising prices of everyday goods. For us it means higher prices for everything we import from China, but for the Chinese themselves many see wage inflation as a good thing. Increased wages should mean better standards of living and disposable income, helping rebalance the economy away from exports and construction, and towards consumer spending.

As far as consumer goods are concerned it was abundantly clear on my visit that many Chinese aspire to luxury. Watches, cars, or fine wines – you name it, if it's luxury, it's coveted. And it isn't the fake goods bought by many Westerners, the wealthy Chinese demand the genuine article. Many of the luxury brands favoured are European. Fine wines are French, watches are Swiss and cars are German. It is therefore possible to benefit from increasing consumption in China by owning good businesses based here in the West. There are many fund managers who have been taking advantage of this in recent years, and it is a trend which surely has further to run.

The property market in China is also fascinating. On one hand there are properties commanding huge rental prices in Hong Kong, and on the other you hear of numerous skyscrapers and residential blocks lying vacant on the mainland. The disparity among the property market is a worry for investors, especially if buildings are being constructed simply to keep the workforce occupied. Who is exposed to the risk these properties can't be rented out, and to what extent?

Certainly this is a concern surrounding investing in Chinese banks, which are notoriously difficult to analyse due to a lack of transparency. We do know, however, that banks are setting aside provisions against bad debts from their substantial profits. In other words they are putting money by for a rainy day – something the West failed to do effectively before the financial crisis in 2008.

Overall though, I am now far more positive on the long-term potential of China. Yes there will be volatility along the way, not least because the Chinese themselves regard the stock market as something of a casino, but the sheer numbers involved are frankly mind-blowing. Whether it's the increase in gambling revenues in Macau this year – equalling an entire year's gambling revenue in Las Vegas – or the biggest selling beer brand in the world (Snow) being one we have barely heard of in the West, the opportunities are incredible.

Alongside the opportunities, there are risks. China remains a communist country and one thing you cannot escape from is the possibility of political interference. There is also the shorter-term danger that rising inflation in China will rattle markets as investors worry about a slowdown in economic growth. If this happens, as it already has to an extent throughout the beginning of this year, investors could be presented with a compelling buying opportunity into this long-term story. In any case I am planning to increase my weighting very shortly.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent