Investment Managers Fascinated by China

THE investment community smells fancy profits in China.

``Investment opportunities for foreign investors will rise dramatically as China speeds up its corporate sector reforms,'' notes the China Analyst, a new report turned out by the Bank Credit Analyst Research Group in Montreal.

Bear Stearns & Co. has also just distributed a report on ``China's Economic Breakthrough'' to investment money managers. The brokerage firm has a large and expanding office in Hong Kong that follows Chinese stocks.

``We are demand-driven in our research,'' says David Malpass, who wrote the report. ``People are interested in China.''

What has stimulated this fresh interest is the extraordinary growth in output in China and a vigorous turn to capitalism that includes the privatization of state industries.

``China's growing economic success is rapidly creating a new world hub for growth and investment,'' writes Mr. Malpass, a former Treasury and State Department economist. ``The prospect of 1.2 billion people leaving central planning behind explains today's high stock market valuations for China and its neighbors. Market corrections, while inevitable, will be buying opportunities.''

Both Malpass and the China Analyst are encouraged by reforms launched last summer and at last month's session of the Communist Party Central Committee, held in Beijing.

``The reform package,'' says the China Analyst, ``is aimed at attacking China's traditional economic boom/bust cycle at its roots by advancing the country's transition to a market economy and setting the stage for fast economic growth, which we would hope can be accomplished with less inflation.'' This report talks of the inflation rate moving from 15 percent this year to 18 percent next year. ``It is too early, however, to conclude with certainty that China is heading into another upward spiral of inflation.'' But it sees high odds that the economy is headed toward another round of overheated growth.

Malpass views as incorrect the ``conventional analysis'' that China is in the midst of a boom-bust cycle. This cycle was broken by economic reforms decided in late June that introduced a stable currency and a more disciplined monetary policy, he holds. Indeed, he sees inflation as falling.

``If China defines its `socialist market economic system' as rapid growth based on private sector agriculture and manufacturing, a rapidly decentralizing economy, and a stable currency, we like its prospects,'' he writes. ``We see no conflict between high growth and stable prices. While the 13 percent growth rate in 1992 and 1993 will be hard to maintain, China could grow an average 10 percent per year for several years.''

The China Analyst notes that China could keep inflation under control by raising interest rates. And it points out that because China is still in the process of monetizing what has been largely a barter economy, more money will be needed as a medium of exchange. So the massive expansion of China's money supply during the past 10 years - an average 28 percent a year - has been absorbed by the economy with less inflationary consequences than would be the case in a more advanced economy.

A 16-point reform plan by China's central bank released in July reduced speculative lending by government banks, guaranteed farmers payments in cash rather than IOUs for their crop, and began restructuring of the banking system.

Malpass sees some results already: Urban inflation peaked in July at 23.2 percent annual rate and fell to 21.1 percent by October. Real estate prices in coastal areas are down 20 percent from their peak in July. The exchange rate, which was nearly 11 yuan to a dollar in late June, has strengthened back to a 8.7 yuan level for the past five months.

Some $13 billion in speculative loans have been recalled. Currency in circulation was up only 17 percent in the first nine months of 1993, versus a 36 percent rise in 1992. Domestic savings in the third quarter were up 85 percent from the third quarter of 1992 as people again chose to hold their savings in yuan rather than gold or some other currency.

The China Analyst devotes 51 pages to the Chinese and Hong Kong scene. Malpass fills some 19 pages - long for such a brokerage report. These indicate the new fascination with China.

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