China will correct, but long-term story is good

Dresdner RCM Asian Selection China fund manager Charles Lo is waiting for a sharp correction in the Chinese stockmarket before buying further stock.

Lo, who in mid-December was forecasting a 15% drop in markets by March, says there are signs of overheating: “So far this year more than half of the country has experienced blackouts. Power consumption has grown by more than 15%, while capacity growth is only 8%.” But he would see a sell-off as a chance to buy “aggressively”, as he is upbeat on China’s long-term prospects.

Rising foreign direct investment indicates the long-term story for China remains good, says Lo: “You have to remember China is still a communist country. It is easy to put money in, but there is no guarantee you will get it back, so this is a serious investment.”

Between 1999 and 2002, the amount of inward investment into electronics and communication equipment manufacturing outstripped other areas in manufacturing, such as textiles. This indicates a structural change in the economy, he says.

Lo predicts an appreciation in the renminbi, which, he believes, will push up stockmarkets. The fund manager says he expects a rise in the Chinese currency – which is currently pegged to the dollar – of between 50% and 100% in the next three years.