Franklin Templeton Investments Corp. and its emerging-markets guru Mark Mobius will launch a China equity fund today, the latest fund hoping to exploit growing interest in the country's super-heated economy.
The Templeton China Tax Class will invest in companies located in China, Hong Kong and Taiwan, as well as companies that will benefit from growth in the country of 1.3 billion people. The fund will invest only in firms that derive at least 50 per cent of their profits and sales from the three markets. The tax classification allows investors to switch between funds and defer taxes until they redeem.
China "is the largest country in the world. We know this is going to be a very, very important market," Mr. Mobius said in a telephone interview from Moscow.
Mr. Mobius has been investing in Asia since the 1970s. In 1987, he launched the Templeton Emerging Markets Fund and today manages about $12-billion (U.S.) in assets around the world, including $1.3-billion in China equity funds.
The fund's launch comes as the Chinese government struggles to rein in economic growth, curb inflation and limit lending. Economists estimate the country's gross domestic product will grow by about 9 per cent this year, ahead of the central bank's target of 7 per cent to 8 per cent.
Fears that billions in bad loans from state-owned banks could cripple the country's economy have spooked many investors.
It's played havoc with emerging market funds, especially the handful of China equity funds available in Canada. Funds managed by AGF Management Ltd. and CIBC Securities Inc.'s Talvest brand have soared 40 per cent to 60 per cent in value over the past 12 months. In the past three months, however, they've lost between 9 per cent and 15 per cent in value.
The market's decline has created some good buying opportunities for Templeton, Mr. Mobius said. He likes equities tied to China's "skyrocketing" consumer spending, about $650-billion in 2002, up from about $150-billion in the late 1980s.
Several Templeton funds own consumer-driven Chinese stocks, equities that are likely to be bought for the new China fund. The list includes:
China Mobile (Hong Kong) Ltd. Mr. Mobius describes mobile phones as "the ultimate consumer product . . . you find them in the hands of almost every socio-economic class." The company is adding an average of two million new subscribers in China each month.
Lenovo Group Ltd. The company manufactures and sells Lenovo personal computers, handheld devices and Internet services. The firm expects to be unaffected by any credit tightening in China and forecasts strong PC growth in the banking, telecom and government sectors.
PetroChina Co. Ltd. The energy company explores, develops and produces crude oil and natural gas. The firm is building a West-East pipeline that will feed China's growing appetite for gas.
The Chinese government is the silent partner in the country's fledgling capital market. Stocks are listed in Hong Kong and professional management approved by Beijing. State-controlled assets are sold into the public company and the government takes a majority stake.
"More and more these companies look and feel like private companies," said Mr. Mobius, adding, however, that investment in China has "lots of risks," including much-needed banking and legal reform.
But there's some agreement that the market's sense of uncertainty is a hiccup on the way to strong and steady growth.
Neil Tait, a former Bank of Montreal executive who still advises the bank on Asian issues, expects China to enjoy "increasing stability as each month and year go by." The economy's rate of growth will continue to outpace the rest of the world, soaring from $1.3-trillion in gross domestic product last year to $2-trillion in 2007, he said.
"For an investor with a longer view, its hard to say China is just a fad and that the opportunities are behind us," said Dan Richards, chief executive officer of Cartier Partners Financial Group.
But potential investors can anticipate a wild ride. Returns for the top-ranked Templeton Emerging Markets Fund range widely, from an 83-per-cent gain in 1993 to a 27-per-cent tumble in 2000. A single-market China fund "implies greater volatility," said Rudy Luukko, investment funds editor at Morningstar.ca.
© 2007 The Globe and Mail. All rights reserved.
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