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We believe that the authorities in China are now managing the change in orientation from an export led economy to a more balanced one, relying more on domestic demand. This will be an ongoing process. In the meantime improving global demand is still a significant factor in China’s ability to achieve its near and mid-term goals.

Reform is being implemented by the relatively new leadership. The easing of the restrictive ‘Hukou’ residential system which ties benefits, such as education, to families’ region of origin, along with the freeing up of some investment restrictions, are signs that they wish to create a more market orientated approach. This is supported by a longer-term aim to have market determined interest rates and to reduce indiscriminate risk taking by allowing some bad investments to fail. Earlier this year we saw the first bond default, which we think is healthy as it removes the asymmetric position where ever more uneconomic projects were supported by the informal/shadow banking sector. However we still believe state related projects will not be permitted to default and that Chinese reserves are sufficient to deal with any likely breakdown in the financial system. Dealing with corruption is also a positive for the mid-term. The regime’s at times inelegant approach to dealing with the financial markets will ease as they become more market aware and more comfortable using the sort of levers applied in established markets.

The economic picture in China has seen a turn for the better with manufacturing production improving and a stronger outlook from purchasing managers’ indicators together with an increasing belief that this year’s economic growth target of 7.5% will be achieved. While there is still concern surrounding the banks and the real estate sector we do not believe that a significant dislocation will occur and while debt is historically high, it is low by international standards. As a result we feel that it may be time to look at China again.