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Over the last few years, I am sure all of us have read research reports from broking firms and several news articles which suggest that future global growth is going to be led by Asia in general and India and China in particular. It’s probably a reality and we Indian investors must take cognizance of the fact, understand data better with the help of our financial advisors and align our investment portfolios to participate in this growth story.

The choice an investor may consider is not India or China but India and China. Both countries offer growth in different ways and we may consider participating and potentially benefiting from both these growth stories.

Interestingly, there are a few myths surrounding the Chinese economy which I would like to dispel.

MYTH No. 1: China is all about only investments and no consumption
Can you actually stop 1.3 billion people from consuming? While trying to dispel this myth, let us understand a little about the behavioral pattern of a Chinese resident and why it is so. Due to the absence of a social security system, people tend to save more and consume less. The savings rate is very high and probably next only to Japan which is a country of the world’s largest savers.

The Chinese government, therefore, stimulates consumption by giving tax sops to residents. For example, in the first half of 2010, there were tax sops for people to buy cars. As a result, consumption rose tremendously and China ultimately overtook U.S.A. as the world’s largest car market. Major car manufacturers have stated that in the first half of 2010, China consumed more cars than U.S.A.

Myth No. 2: China is an export-led economy and exports only to the U.S.A.
It is factually correct that net exports have contributed to GDP growth over the last so many years (barring 2008 and 2009), but it’s incorrect to assume that this is solely U.S.-led. China’s exports to Asian countries (ex-Japan) account for 39.2 percent of her total exports while imports from Asian countries (ex-Japan) account for 47 percent of her total imports. Exports to the U.S. account for 18.4 percent while imports from the U.S. account for 7.7 percent of her total imports.

While there is a U.S. angle to the overall exports basket, we must not forget the large segment of Asia Pacific (ex-Japan) and also ‘emerging market’ countries. Apart from a sluggish 2009 and Q1 2010, net exports are picking up and is expected to contribute to GDP growth positively.

Myth No. 3: The Chinese government spends only on infrastructure
As mentioned above, China lacks a social security system unlike the western world. The government is, however, currently working towards establishing such a system. But let’s not forget that it takes a considerable amount of time to create and implement a robust system to cover 1.3 billion people. Knowing the government’s ability and track record to execute projects, it is probably safe to assume that a social security system will successfully be put in place by 2015, which is the deadline set by the Chinese government.

Let’s look at some specific numbers on this aspect to have a better understanding. Government’s budgetary spend on public housing increased to 15 percent in 2010 from 10 percent in 2009 and spends on healthcare and education increased to 25 percent in 2010 from 5 percent in 2009. The overall budgetary spend increased from Rs.324,000 crore in 2009 to Rs.391,500 crore in 2010.

The government is working towards creating 5 million housing units by May 2011. This increase in budgetary spends towards public housing, healthcare and education is at the cost of reduction in spends on infrastructure from 70 percent to 40 percent. This development also has a spiral effect on many industries.

Myth No. 4: China is only Beijing and Shanghai
This is a big myth which we grapple with all the time. While Beijing and Shanghai are the two biggest provinces in coastal China, there are many more provinces in interior China. It is worth our while to note that coastal China can probably boast of having one of the best infrastructure facilities in the world, the situation in interior China is not so and a significant proportion of the government’s infrastructure spend is towards interior China. People’s Republic of China is divided into four municipalities namely Beijing, Shanghai, Chongqing and Tianjin and 23 provinces. There are over 160 cities in China with a population of over one million. The total population is 1.335 billion representing about 22 percent of the total population of the world.

Interestingly, as per U.N. statistics, only 40 percent of the total population lives in urban China (2005) and this is expected to grow to 53 percent in 2020. This growth in urbanization has a positive impact on all sectors of the economy, from housing to consumer electronics to two-wheelers and cars etc.

Myth No. 5: It’s not worth investing in China now
While China has underperformed in comparison to her Asian peers, it is still a destination worth looking at. Let’s look at some data points and try and analyze the situation in a little more. As on September 20, 2010, China is trading at 12.3x 1 year forward earnings (historical 5 year average being 13.5x), trailing price to book of 2.5x (historical 5 year average being 2.7x) with EPS growth estimates of 25.9 percent in 2010 and 16.9 percent in 2011. These numbers suggest that from a valuation standpoint and earnings growth estimates, China does offer a compelling story from an investors’ perspective.

The question one needs to ask oneself is whether it’s worth considering investing in a market which is trading well below its historical average and offers reasonably good earnings growth. I would believe it’s definitely worth exploring the potential whilst remembering that China has and will continue to contribute significantly towards global economic growth.

The opinions/views expressed herein are the independent views of the author and are not to be taken as an advice or recommendation to support an investment decision.

ARINDAM GHOSH is Head, Retail Sales, J.P. Morgan Asset Management.

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China, J.P. Morgan, myths, smetv