Is China still looking like a good investment?

The economic revolution that has occurred in China over the last 20 years is nothing short of a miracle. This was built on the back of cheap labour and large natural resources and has made China the world's production house. However, in recent months, with China revaluing the Renminbi and Chinese workers demanding more money, is this the end of the economic miracle?

The Chinese authorities announced a move to a more flexible management of the Renminbi, which had been pegged against the US dollar since July 2008. China succumbed to international pressure, holding their currency at artificially low levels to give their exports an international advantage. This move may be positive for the rest of the world as it helps to use market forces to rebalance international trade. Nevertheless, it could seriously increase the value of China’s exports in international markets and subsequently reduce the demand for their products. This will reduce the profitability of many of the large Chinese companies and could slow economic growth in the country. Even so, the appreciation of the renminbi will be relatively slow due to the daily growth cap and the basket of currencies it is now pegged against. Most estimates suggest that it will take one year for the currency to rise by 3-5%.

The cheap labour that helped the Chinese economy grow so rapidly may be coming to an end as the workers rebel in search of a livable wage. There have been various high profile walkouts by Chinese workers in companies such as Toyota and Hyundai leading to staff pay rises of 30%. With growing fears of unions and worker pressure, the Chinese government is increasing the average minimum wage across nine providences in an aim to curb discontent amongst the workforce. These wage increases will no doubt reduce the overall profitability of the firms and make goods produced in China more expensive. However, by putting more money in the Chinese workers’ pockets, this allows the domestic economy to grow, as the average consumer will now be able to purchase more goods. It could actually be a very strategic idea, as the global output continues to decline, it would be better in the long run for China to have steady growth in wages to generate a domestic economy.

Overall, there are some obvious headwinds that will face the Chinese economy in the short term. In spite of that, as the domestic consumer grows and China’s internal economy expands to be the largest consumer market in the world, you would have to think that investing in such a dynamic country will be profitable in the long term. Like all investments in emerging markets we would warn you these markets are often volatile and only for the experienced investor. If you would like to gain exposure to China we currently offer a specialist fundin this sector.