Datapoint. ‘The best is yet to come for China’

Everyone believes the Chinese economy is rapidly losing steam. But Kevin Gin, Principal and Director at Alpha Capital, an investment advisory firm that invests in various asset classes in the Asian market, including real estate, equities, private equity and debt, is quite upbeat.

Why China? Even if you ignore GDP growth, which is flat at 7 per cent, isn’t other data, such as retail sales growth — which has dropped from over 13 per cent during 2013 to 12 per cent in 2014 — pointing to a slow down?

“China is a large country and the danger is that averages do not really represent what is happening in the country and could do injustice at times,” says Gin. He points to online sales, which are robust and were growing at 50 per cent in 2014. Then, there is the jump in the number of air travellers and their cargo. For instance, China Southern Airlines reported a 20 per cent increase in the number of international passengers and an 18 per cent increase in cargo carried in November 2014 compared to a year ago. He also feels that falling inflation – from 4 per cent in the past to 1 per cent now – could be a trigger to growth as improving real returns should help bring in more investments.

The other factor in favour of the country is its heavy investments in infrastructure. “I have been to China’s interior regions over the years. Their rail network is expanding and their high-speed trains have helped shrink vast distances,” he notes. There is also a continued focus on planned development, infrastructural improvement and urbanisation. “In a railway project, the State buys land in the area along the route to build homes, offices and retail,” he says. He also believes that China’s emphasis on indigenous technology in key areas such as internet is paying off. While the country has opened up retail to foreign firms, strategic areas such as defence, mobile and internet are closed to outsiders. Home-grown internet companies such as Baidu have made great strides in solving critical problems. Already, nearly half of the toys manufactured worldwide are from China and over a fourth of electronics originate there.

Agreed, China has opportunities. So how can investors profit from it? Real estate is one option, says Gin. Data shows that the returns of the stock market bellwether, the Shanghai Index, have not reflected the growth potential in China. “A few companies such as internet portal Tencent track the country’s GDP growth. Likewise, segments such as baby food (and) pharma companies have done well, but are not well represented in the index,” he explains.

But physical real estate returns have handsomely beaten the GDP growth rate, especially in Tier I cities. Prices have risen by 18 per cent CAGR over the last 15 years, over twice the rate of GDP growth.

But haven’t prices increased too high too soon?

Gin does not think there is a bubble or cause for alarm. “Property prices depend on expectations of future job prospects and demographics,” he points out. As more regions start to be connected and take part in growth, there will be more opportunities for investment. Affordability is rising as wages in the last three to five years have gone up a faster rate than home prices.

Plus, lower rates should help housing, believes Gin. Also, as affluence increases, there is replacement demand for larger housing units that have more amenities.