For many investors, the first half year of 2010 ended in a disappointing way despite there is no major correction during the period. Instead of short-term market movement, let's try another angle this time. I often hear people ask: which China stocks should an investor buy from a long-term (over 5 years) perspective?
It is not easy to give a quick answer to this question as it actually involves complicated issues, including changes in China's demographic and industrial structure. In fact, recent worker protests and wage hike issues in China are outcomes of those fundamental changes. Research papers in recent years have pointed out that after 30 years' reform, China has entered the Lewis Turning Point. This refers to the process when surplus labour shifts to non-agricultural sectors continuously while the increasing demand on labour in non-agricultural sectors eventually leads to labour shortage. Experiences in Japan and Korea reflect that wage hike is inevitable once a country passes through the Lewis Turning Point. Also, higher wages will push up the inflation. Another structural problem that China faces is aging population. It is estimated that people aged over 65 will reach 10% by 2012, making China an "old country" according to common international standard.
Is there any solution to solve these problems? The answer lies on industrial structure upgrade and urbanization. Based on experiences from both Japan and Korea, it will be a long process to switch from labour intensive light industries to capital intensive heavy industries and then technology intensive high-end manufacturing. Currently, urban residents only account for 47% of the total population in China which is far below many other countries in the world.
For stock selection, companies with relatively high labour costs in total production costs will obviously face more impact. In the long run, domestic consumer sectors will be a prime beneficiary while some technology and newly developed sectors will also achieve higher growths. Besides, property sector should also benefit from urbanization process.
| Source: |
Mr. Peter Pak, Executive Director
BOCI Research Limited |
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