The Greater China region, which encompasses China, Hong Kong and Taiwan, offers promising opportunities for investors. Average real gross domestic product (GDP) growth for the region accelerated to 9.0 percent over the 2003-2006 period from 6.4 percent over the 1999-2002 period due to China's strong economic growth, rebound in global economic activities, and the end of the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003.
China has emerged as a major growth engine for this region apart from the U.S. with real GDP growth sustained at a robust average of 9.2 percent per annum in the past 10 years.
Meanwhile, Hong Kong is one of Asia's most vibrant financial services hub that has benefited from its close economic and financial linkages to Mainland China. Taiwan, on the other hand, is a global manufacturing powerhouse that has enhanced its market leadership in electronics products by capitalising on China's abundant supply of skilled labour.
Factors underpinning Greater China region's economic growth
The factors that contributed to the rapid growth of the Greater China region are expected to continue driving the region's economic prospects in the next 10 years.
Firstly, the Greater China region has benefited from significant inflows of foreign direct investments (FDI) with China accounting for the largest share. Thanks to its industrialisation drive, total FDI into China amounted to US$467.7 billion over the past nine years. Almost half of China's exports are currently produced by these foreign-owned enterprises. Investment spending, which accounts for 41 percent of China's GDP, has been growing at a robust pace of 20 percent per annum over the 2003-2006 period.
Secondly, exports have been a major source of growth for the Greater China economies. Hong Kong, Taiwan and China are among the most export-driven economies with exports contributing 167 percent , 63 percent and 36 percent to their GDPs respectively in 2006.
China is a major destination for Asian exports with two thirds of China's imports sourced from Asia. The price competitiveness of China's exports has been supported by an abundance of skilled labour, and the relative undervaluation of the Renminbi. Competitive currency values have also helped Taiwan and Hong Kong increase their exports in global markets.
Thirdly, higher standards of living and disposable incomes have fuelled consumer spending in the region. In China, domestic consumer spending grew at a healthy rate of 13.3 percent in the last three years. Consumer spending has been supported by the rising trend of urbanisation in Chinese cities with the urban population ratio increasing from 26.4 percent in 1990 to 43.9 percent in 2006.
As more Chinese migrate from the rural sector to higher paying jobs in the cities, their standard of living improves. The Hong Kong economy benefits from China's increasing affluence as more mainland tourists visit the island. In Taiwan, consumer spending has been driven by sustained economic growth.
Fourthly, monetary policies in the Greater China region have remained accommodative in recent years. In view of manageable inflationary pressures, most central banks in the region are able to maintain an environment of stable interest rates, which is conducive for consumer spending and investment.
Growth prospects for Greater China region
The Greater China region's real GDP is estimated at US$1.9 trillion in 2006 accounting for 5 percent of global GDP. The Chinese economy is projected to grow steadily by 11.2% in 2007 and 10.6% for 2008, supported by resilient domestic consumption, investment and exports. Driven by strong domestic demand and robust tourist arrivals, Hong Kong's GDP growth is set to expand at above 5 percent for 2007/2008. Meanwhile, TaiwanÕs GDP growth is projected at above 4 percent for 2007/2008 amidst resilient investment spending and global demand for electronic products.
Supported by inflows of FDI, strong trade surpluses and sustained economic growth, the Chinese Renminbi appreciated by 3.9 percent against the U.S. dollar on a year-to-date basis to October 19, 2007.
Outlook for Greater China Markets
In the past five years, the Greater China markets trended up amidst China's robust economic performance and strong investor demand to participate in the region's growth prospects.
The Shanghai Composite Index and the Hang Seng China Enterprises Index ('H' shares index) have outperformed with year-to-date returns of 117.5 percent and 90.7 percent respectively up to October 19, 2007. The Hong Kong and Taiwan markets registered more moderate returns of 47.6 percent and 22.9 percent respectively over the same period.
In terms of valuations, the price-to-earnings (P/E) ratio of China 'H' shares on 2007 earnings has risen in tandem with the run-up in the Hang Seng China Enterprise Index following the announcement that Chinese residents will be allowed to invest in overseas investments.
At the current P/E of 28.1x, valuations of 'H' shares are still significantly below the valuations of Chinese 'A' and 'B' shares listed on the mainland exchanges. In comparison, Hong Kong and Taiwan stocks are trading at lower P/Es compared to their regional peers.
Looking ahead, the prospects for the Greater China region remain exciting with the equity markets supported by sustained economic growth, high levels of savings and liquidity.
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