Did You Know - Autumn 2006                                                                     Previous Did You Know

The China Effect

When investing, many Clients consider where they would like their money invested and what level of risk they are prepared to accept. Issues that can affect their decisions can range from the amount they want to invest, whether it is for growth or income, their ethical views and what other investments they have made in the past.

The scale of risk can range from the lower end of the scale, such as cash and Gilt funds to the higher end of the risk scale, such as the ‘Tiger economies’ of the Far East. The area that is attracting a lot of attention at the moment is China and its effects on worldwide trade and economics. Other areas of the world, such as India, are also currently booming, but it is ‘the China effect’ which is currently generating most press comment.

So what is ‘The China Effect’?

Before we consider this further, let’s look at a few statistics on China:

  • The fifth highest annual GDP growth in the world with an annual average increase of 9.1% in the period 1994 to 2006 (the highest is Equatorial Guinea with 20.9% obviously from a lower base. China had the highest in the period 1984 to 1994 at 10.3%.
  • China is the 6th biggest economy in monetary terms, or the second biggest if adjusted for purchasing power.
  • China is the worlds 6th biggest exporter (behind the Eurozone, US, Germany, UK and Japan).
  • China is the third largest recipient of foreign direct investment - behind the US and UK.
  • According to the Economist - approximately 90% of business software in China is pirated.
  • China's stock market is around 25% the size of the UK's.
  • Approximately 44% of China's GDP is accounted for by investment compared to 17% in the UK

Source for all statistics: The Economist, World in Figures, 2007 Edition.

Historically, investing in the Far East areas is higher risk, and this is still the case.

Some institutions have found that direct investment into China can have its issues. Many have favoured indirect exposure to improving economic conditions in China (and India).
Such exposure is delivered in the form of investment in companies deriving profit from these regions but not being domiciled in China in particular where security and property rights require further development. A recent *report, citing losses of $1.5billion owing to corruption and an inefficient tax collection in China, adds to the belief that investing in ‘the effect’ is the most appropriate method for seeking gains.

*Source: Carnegie Endowment for International Peace (8% of GDP, GDP is $1,932billion)

If you would like to review your existing investments or consider new arrangements then please speak to Churchouse Financial Planning Limited. 

For guidance and information purposes only and does not constitute advice or recommendation to invest. The value of funds can fall as well as rise. Please seek Independent Financial Advice before proceeding with any changes/new contracts. The Financial Services Authority does not regulate taxation advice.

 


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