Mobius Bullish on the Year of Ox
by Mark Mobius, Ph.D. Executive Chairman, Templeton Asset Management Ltd
Dr. Mark Mobius, Executive Chairman, Templeton Asset Management Ltd and Fund Manager of the Templeton Emerging Markets Investment Trust (TEMIT), discusses the outlook for China
On January 26th, China and Chinese all over the world celebrated the beginning of the Year of the Ox. I would prefer to call it the Year of the Bull because we expect that 2009 will be the year that the emerging stock markets witness a substantial recovery and China should lead the way to that recovery. The investment prospects and long-term outlook for China are excellent for a number of reasons:
(1) The Chinese leadership is intelligent, resourceful and enlightened with an interest in maintaining growth with a better standard of living for all Chinese,
(2) that leadership has the organisational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world,
(3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and
(4) China has one of the healthiest banking systems in the world and most individuals have little debt.
Undoubtedly, China will not be able to achieve the double digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programmes targeted at the domestic market, which are designed to replace export-led growth with the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption should be more attractive. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.
Since 15 September, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were in 2008 designed to restrain banks from lending, will probably be unofficially abandoned.
With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints on inflation has been the crunch in trade financing which became a global problem, but as a result of new support from Beijing, this problem seems to have eased.