Email Print

OLYMPICS NOT THE STARTING GUN FOR CHINA

Jul 25, 2008

London, 25 July 2008: China's economy will continue to develop beyond the forthcoming Beijing Olympic Games, according to JPMorgan Asset Management's Pinakin Patel. He said the ongoing economic transition, where China is gradually moving up the value chain in terms of production, has been taking place over the last decade and will continue to do so after the games.

Pinakin Patel, Client Portfolio Manager said of the reported USD 1,712 billion* of fixed asset investment in 2007, only USD 48 billion was spent in Beijing. Further to this, of the USD 34 billion the Chinese government estimates as the full spend on the Olympics, just USD 8 billion is directly related to the games, the rest is being spent on infrastructure for Beijing such as new airport links and an extension to subway systems.

The majority of fixed asset investment has been focused on infrastructure in the inland provinces in a bid to reduce China's dependency on highly developed coastal cities and increase the importance of less developed rural areas.

As well as fixed asset investment which provides good infrastructure, the Chinese government is also implementing policy changes such as labour rules, anti-pollution regulation and tax unification. These steps are aimed at moving China up the value chain to provide high end value added goods.

These changes, in addition to high input prices (electricity and commodity prices) have impacted margins for lower end manufacturing businesses such as clothing, furniture and watches – historically the core of China's export industry. However, through the cultivation of foreign joint ventures China is gradually transitioning to high end manufacturing, largely to meet the increasing demand.

Pinakin Patel said, "China has long been considered the workshop of the world, providing low cost goods at minimal cost. The reality could not be further from the truth, for example more than 70% of the world's laptop computers are manufactured in China. In 2007, the growth in high value industries, such as the auto industry, grew by over 90% and shipping by 50% in value terms, whilst the so called old economy sectors such as toys and footwear rose by only 15 to 20% in the same year.

In the ten years to 2007 exports for low-end goods fell by approximately 10% while exports of high end goods rose by 25%. Today, machinery and equipment represents 48% of China's total exports**.

China has stated very clearly that it intends to see higher levels of mergers and acquisitions and consolidation in a number of key industries. For example there are over 250 state owned enterprises and the aim is for the government to identify 30 or so state leading companies that can compete not only domestically, but also globally.

Patel concluded, "As China becomes a focal point for the Olympics, we continue to believe that China offers good long term investment opportunities and by focussing on its new export market will provide some shelter from the world’s wider economic uncertainties."

# # #

China's Major Export Components

* Source: CLSA Asia-Pacific Markets
** Source: CEIC

For further information please contact:

JPMorgan Asset Management
Jayne Bowers
Telephone: 020 7742 8337
Email: jayne.e.bowers@jpmorgan.com

Lansons Communications
Lyndsay Haywood Charlie Field
Telephone: 020 7294 3660    /   Telephone: 020 7294 3616
Email: lyndsayh@lansons.com    /   Email: charlief@lansons.com 

Notes to Editors

JPMorgan Asset Management is part of J.P. Morgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.2 trillion in assets under management (the Asset Management client funds of JPMorgan Chase & Co. as at June 30th 2008) and offices in 40 locations around the world, JPMorgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.

JPMorgan Asset Management is a trading name of JPMorgan Asset Management Marketing Limited which has issued this material in the United Kingdom and which is authorised and regulated by the Financial Services Authority.  Registered in England No. 288553.  Registered office: 125 London Wall, London EC2Y 5AJ.

Any past performance referred to in this material is not a guide to future performance and the value of investments, and any income from them, can fall as well as rise.  Any tax concessions referred to are not guaranteed and their value will depend on the individual circumstances of investors.  Stock market linked investments carry a number of inherent risks.  These risks will increase where fluctuations in exchange rates impact on the value of any underlying investments or where the investment is exposed to smaller companies or emerging markets.  Investments in fixed income securities that are not rated as investment grade represent a greater risk to an investor's capital.