Changes in Chinese policy, if legitimate, may begin to curb inflationary trends and ultimately attract investors back to China
The average investor believes investing in China is an attractive alternative for their future investment portfolios. In fact, 33% of households with more than $5 million are looking to invest internationally in the next 12 months. Twenty-five percent of those with $1-5 million of net worth and 12% of households with $100,000 to $500,000 of net worth are also looking to test the international waters this year. Investing in China is the most commonly chosen international investment aspired to by these investors.
Sophisticated investors, including institutional investors, have pulled money out of China recently due to both the unrest in the Middle East as well as the challenge of the Chinese government to control inflation during its ongoing dramatic growth.
This weekend, Premier Wen Jiabao made a speech to the National People's Congress, as reported by Bloomberg, that may allay some of the fears of investors and lay groundwork for a new and more interesting investment story for China.
Wen announced that domestic consumption will be the primary growth engine for its future as opposed to the export driven growth model that has fueled its economy for the last fifteen years. China will target 8% economic growth and will "decisively" curb increases in prices that will threaten social stability.
This is important news for the millions of workers that still work at barely subsistence wages in China. For many, although the economy has been growing, their wages have not. As the price of food has increased due to both inflation and the world commodity price challenges, workers have been unable to save money. They must spend all of their wages on food.
Another challenge, according to the Financial Times, has been the rise in the cost of real estate in China. Real estate ownership has been viewed as the means to establishing a middle class in China. Unfortunately, the cost of real estate has increased 6% each year since the mid-1990s. Instead of increasing the middle class it has primarily increased the feeling of plutocracy. The average worker can put his savings in bank CDs that earn 2.8%. With the price of real estate increasing more rapidly, workers are feeling frustration that they will never be able to afford to purchase their own home. The government will increase spending on low income housing by 35%.
Wen's speech indicated that subsidies will be given to low income earners and farmers and continuing incentives will be allowed for the purchases of appliances. The goal is to begin to increase domestic consumption within China. Additionally, Wen states that the minimum wage across China will be increased and banks will be encouraged to loan money. (Although apparently this is not without its opponents.) The government will no longer set lending targets for banks.
China hopes to keep inflation at no higher than 4% for 2011. It states that reigning in consumer and property prices is its number one goal. But critics believe that its inflation could easily reach 11% before year end.
So is now the time to consider investing in China? The key will be the ability of the government to keep its workers happy through an increased standard of living so that the unrest experienced in other developing countries does not affect their attitudes. So far it has worked. The ability to maintain the strategy will continue to be a balancing act for the Chinese government that has, so far, managed to maintain its footing.