China growth not dependent on US consumers

Lyxor Asset Management's upcoming A/H share fund, which launches in January and will arbitrage between the mainland Chinese and Hong Kong stock markets, is underpinned by a conviction that China's economic growth will remain strong in 2008.

Glenn Maguire, chief economist at affiliate SG Securities in Hong Kong, says China's domestic investments will maintain the pace of growth regardless of what happens to consumers in the United States. To begin with, he argues, US-bound exports only make up a small portion of Chinese GDP. He believes growth in China is largely driven by domestic investments, which are isolated from hot money. Over the course of 2008 and 2009, he says the country will see more government-led investments.

ôThe bulk of growth is determined by domestic expenditures, such as household consumption or business investment,ö he says. ôVery heavy investment in infrastructure projects - such as the Beijing Olympics in 2008, the Shanghai expo in 2010, the acceleration in the central and western provinces development - will continue regardless what happens to the US economy.ö

Nor are these mere one-off marque projects to impress foreigners: such large-scale government spending initatives are critical to maintaining social stability and staving off unrest, Maguire argues.

"The risk of political unrest is rising thanks to extremely high food prices," he says, noting the 80%+ rise in pork prices this year. ôThe government really cannot afford to add rising unemployment to that mix."

This is complicated by continuing migration from rural to urban areas, which requires GDP growth of 9-10% to create enough jobs. And if the economy alone can't provide employment, the government is prepared to use its foreign reserves to promote investment-led growth, as it did in the mid-1990s.

Lyxor is launching its China A/H Shares Opportunities Fund on January 30, 2008. It aims to capture price differences between the A and H shares of dually listed Chinese stocks in Hong Kong and the mainland. Despite its name, it will carry no allocation to A shares but instead invest in 12 H shares that present the biggest differences in valuations.

There are currently some 50-odd names amongst this dually listed world. Derek Ng, vice president for equity derivatives and structured products at SG Securities, says he aims to raise $50 million for this new fund. Anticipating more incoming QDII liquidity and the soon-to-be approved æthrough trainÆ program, Ng says the A/H share price differential amongst these dually listed names are only set to narrow over the course of 2008 and 2009.

This long-only fund will be reviewed and traded quarter. Minimum investments starts at $3000, while management fee is at 1.5% per annum and another 0.5% will also be charged quarterly for ôfixed cost recoveryö.