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YOUR SHOUT |MARCH 2012 What do you think?

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“Why are there so many Bears in the China shop?” asks former UK Minister

Dear Editor, I have been urging investment in China for months. So far, it has been going well. Last autumn the Chinese property market looked very cheap. It was off ering nearly a 4% yield. The background was persistent bearishness by most

professional western commentators. Today there are still plenty of bears in the China shop. I

read a piece claiming that China’s low public sector debt ratio of around 20% is really over 100%, if you add in pension liabilities, possible local government losses, and possible banking losses. The commentator did not say what such draconian

accounting treatment would do to the much larger western sovereign debt levels already recorded. Many bears claim that there will be a big housing bust in China. They concede that it will not come about as it has in the US, UK and Spain from excess mortgage credit, as many Chinese buy their properties with cash. Chinese buyers needing mortgages have, on average,

relatively low debt to price ratios. They just think sentiment is now negative and this

could turn into a crash. If property goes, the banks get into trouble. China,

they argue, could do what much of the West did in 2008. It is true recently house prices have been falling a little. They could fall more. Banks could have larger losses. I suspect the Chinese

state will act to stop this doing serious damage to the wider economy. I think the persistence of this thinking can be turned around to be part of

the bull case. Western smart commentary has kept most funds out of China altogether,

“All those people who worry about China should ask themselves why the market has started to rise so well”

or has limited them to very small investment positions in the world’s fastest growing large economy. Last month, I was on a panel at a conference organised by Quantum Advisory,

talking to Pension Trustees. I was one of a panel of three. I was asked to make the case for China. I did so in

general terms, and reminded my audience of its poor performance last year and the risks people saw in it. At the end of the presentations, our host asked the audience which of

the three markets we had discussed would receive their money, if they each were given £10,000 for their own personal investment and had to invest in one of the three.

Five hands went up for Europe, two hands went up for the USA and the large

majority voted for China. That decision clearly refl ected their views and the facts of the case. Last year, the Chinese economy grew by 9%. Industrial profi ts were up by 25%. 12.2 million new jobs were created in the cities, where unemployment averages 4.1%. The economy is running a substantial trade surplus, offi cial government borrowings are light and the overall tax-rate is just 22%. The budget defi cit is under 2% of GDP. 38% of the workforce is still employed

in agriculture, producing just 10% of total economic output. This leaves plenty of scope for more people to come off the land into more productive employment. In 2011 China started her new 5 Year Plan. At its heart is the wish to boost incomes, living standards and domestic demand. China is well aware of the limits to more growth from exporting to heavily

indebted western societies. All those people who worry about China should ask themselves: “Why has the market started to rise so well?” Could it just be that China’s obvious achievement in making, exporting and

investing will from time to time come out in higher share values? What more do the bears want China to achieve? John Redwood, Chairman, Evercore Pan-Asset Investment.

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