As the Chinese Year of the Dragon begins this week, we round up some expert commentary on investing in China.

Can an allocation to the Asian country breathe life into a portfolio and produce glowing returns, or are China investors in danger of getting their fingers burnt?

Fen Sung, manager of the Premier China Enterprise Fund:

‘With the fast-approaching Chinese New Year, how will the Dragon year revitalise one of the cheapest stock markets in Asia, and avoid China experiencing a hard landing; which I define as GDP growth of below 7-8 per cent? Despite being the most revered year among the Chinese, 2012’s rally in stock markets is not down to superstition.

'The two fundamental factors required are attractively valued equities, and monetary and fiscal easing. How much easing and where is the conundrum? The key statistic that China needs to predict is net exports. Under normal economic conditions, net exports contribute positively to GDP growth, but I believe 2012 will be a similar situation to 2009, where net exports contribute negatively.

'Historically, China simply mitigates this through Fixed Asset Investment (FAI). After the collapse of Lehman’s, the amount of FAI spent in 2009 almost doubled, and focused on infrastructure and housing. This achieved an overall GDP growth rate of 9.2 per cent; note, net exports contributed negatively, to the tune of -3.6 per cent.

'For 2012, FAI will not focus on housing, which will be scaled back. This is because demand for houses has started to fall, and China cannot afford a collapse, as land sales are a primary revenue generator for local governments.

'Investment ideas on the back of FAI spending for 2012 will again include infrastructure, where I favour energy, namely oil and gas, and water and sewage treatment. Finally, industry automation and moving up the value chain will also benefit, thus allowing China to move away from low-end manufacturing.’

Jim O'Neill, chairman of Goldman Sachs Asset Management:

‘[China's economy growing 8.9 per cent in the fourth quarter of 2011] is a bit stronger than I thought actually. It is a bit of a blow for the hard landing guys, given inflation has come down so much as well. And policymakers are moving away from restraints and flirting with some sort of stimulus. 

'Let me put it in the context of a bigger picture. I am assuming this decade China grows by 7.5 per cent. Translated into dollars, if they do that 7.5 per cent, China will contribute in dollar terms more than the US and Europe put together this decade. So it's the most important thing in the world, is what I'm trying to say.

'All of the concerns [about China] that many people have expressed are pretty important issues to consider. There are lots of challenges, as there frequently are with China, but the thing that generally impresses me is that Chinese policymakers themselves do not shy away from acknowledging that many of these things are issues, and they try to deal with them. The big one is the property issue. Something that many people in the West, particularly in the US misunderstand about this - it is not like the UK or US bubble bursting. Chinese property prices have turned because the Chinese authorities have deliberately stopped them from going up. That is what the Fed should have done in 2005 and 2006 and maybe before that, but it is tough in a democracy.

'That is why you get the wild housing bubbles in many Western economies. In China's case, they are doing it deliberately to stop a bubble. I think a fundamental point is people got the approach wrong about that topic.

'[However] I would imagine that some democracy a la Chinese style will emerge. It's not going to be one that we embrace and bless. Importantly, from everything I have understood from going there for 20 years, the Chinese do not crave the exact form of democracy that we have and think they should have. They want more freedom and really want more wealth. If the Chinese authorities continue to provide that and it spreads, then I think generally speaking, the Chinese people will be happy. A key part of what is going on right now, [is that] they are deliberately raising wages significantly, which is much ignored in the discussion of the exchange rate.’

[Source: Bloomberg Television]

David Osfield, manager of the Alliance Trust Asia-Pacific Equity Fund:

‘The key issue for 2012 remains how hard or soft a “landing” will the Chinese economy experience. Specific concerns remain regarding the Chinese banking sector such as the impact of any fallout from the boom in shadow finance and the management of defaults arising from local government financing vehicles. On a more positive note, inflation should moderate due to slower growth, abating commodity prices. Operating margins could be better than expected, particularly for those companies with strong pricing power and lean businesses.

'Although earnings visibility remains low in the current environment, 2012 earnings have already been reduced by around 10 per cent over the past six months. On that basis, the region trades on around 11x P/E and yields c.3.5 per cent with a 40 per cent payout ratio – this income characteristic is often overlooked due to the regions’ growth appeal.

'Despite the weak prognosis for the global economy, there are numerous opportunities in Asia that are more self-sustaining and hence should remain relatively insulated from Western deleveraging. Overall, the mid to long-term fundamental drivers of growth in Asia continue to look compelling  – strong company balance sheets, high levels of savings, favourable demographics, and ongoing urbanisation should provide substantial opportunities for investors with a time horizon beyond the immediacy of the next headline.’

Andreas Roemer, head of emerging markets at DWS Investments:

‘China’s investment potential looks set to remain strong in 2012, benefiting from the same forces that drove asset markets in the US and Europe in the 1990s and 2000s. Excluding the deflation threat caused by the European debt crisis and based on the latest purchase managers’ index (PMI) data, China’s economy seems to have found its feet. Global consumer spending has received a boost since its significant decline and the Chinese government is making positive monetary and fiscal decisions to maintain a stable economy and encourage growth.

'We expect a modest fiscal easing in 2012 with government priorities focusing on public housing, completion of ongoing infrastructure projects, small to medium enterprises, services and consumption. China has been underperforming steadily since the end of 2009, mostly due to overheating and tightening fears. These fears are gradually fading; therefore we believe that investors should take a positive view.

'During the annual Central Economic Working meeting (12-14 December 2011) the government maintained its economic objective of "striking a balance among stable growth, structural adjustment and inflation control". In this context, stimulating domestic demand, particularly consumption, is a priority. Policymakers are highlighting the importance of maintaining appropriate investment scale in railways, agriculture irrigations, for example, while ensuring the financing demands of existing projects.

'We believe that investors who maintain exposure to China will benefit from the relatively better growth prospects. In addition, current valuations are at 10-year low points, providing a great entry point for long-term investors.'

Darius McDermott, managing director of Chelsea Financial Services:

‘Given a pretty awful 2011 when the MSCI China fell around 18 per cent, many investors may be reluctant to buy China right now. But the sell-off means that Chinese equity valuations are now pretty low, not only compared with the market's own history, but also compared with other markets in the region. With the exception perhaps of consumer staples, all sectors are cheap.

'I believe that China's growth story is still intact. Yes, economic growth has visibly slowed as export demand from Europe and the US remains sluggish, but it is still likely to be in the high single digits, which will be the envy of developed markets again this year. The consumer is still relatively strong and the government has acted very sensibly, firstly to try to cool off overheating sectors and then, more recently, in its willingness to stimulate the economy with VAT reforms and the easing of bank lending restrictions. With inflation starting a downward trend, monetary policy is likely to ease, which should be a positive for equity markets.

'There are some stumbling blocks in the way. The once-in-a-decade leadership transition will create some policy uncertainty and the market isn't immune to the problems in Europe which means volatility will probably continue, but any period of weakness should present investors with opportunities which will reward in the long term. For those wanting to perhaps benefit from the volatility rather than worrying about a lump-sum investment, they could consider investing monthly and taking advantage of pound-cost averaging.’

Mark Mobius, manager of the Templeton Emerging Markets investment trust:

‘With a consumer base of 1.3 billion people, consumerism has been flourishing in China. Foreign direct investment continues to grow as international investors remain attracted to China's booming economy. Its foreign reserves are also the largest in the world, making it less vulnerable to external financial shocks.

'China remains one of the fastest growing major economies in the world. During the last quarter, inflationary pressures continued to ease and the industrial sector continued to record strong growth. In January 2011, China started allowing its domestic companies to use the renminbi for overseas investments. That was regarded as the next step in a series of measures that China has put in place over the past few years to internationalise the renminbi. Despite global reservations stemming from China’s status as a developing country and its cautious approach to monetary policy, it is very possible that the renminbi could become a global reserve currency by 2020. If that occurs, it would further cement China’s prominence on the global economic stage. The renminbi might potentially replace the role of the Japanese yen, given that its usage was driven by Japan’s former economic dominance.’

Terry Smith, chief executive of Fundsmith:

‘It’s becoming more likely that China will have a hard landing. It’s hard to tell as the figures coming out of China are not reliable. The anecdotal evidence is all bad though, such as reports of crony capitalism.

'Investors shouldn’t think “the US is not very good, Europe is bad but don’t worry, we’ve got China”’.

Apart from Hong Kong and Shanghai, it’s a poor country. China is a dangerous place to invest. It’s not a democracy and companies struggle as they have to form a joint venture to trade in China. Just look at what happened when Danone went into China – it noticed a competitor selling similar products and then discovered it was its joint venture partner.’