The Greater China story will gather momentum this year, underpinned by domestic-driven secular growth in the mainland economy and favourable liquidity conditions, says JP Morgan Asset Management.

Howard Wang, head of the firm’s Greater China team, maintains an optimistic view of China’s economy as “it undergoes long-term rebalancing towards domestic consumption and repositioning towards more sustainable, higher-quality and potentially more profitable growth”.

“China will continue to deliver solid growth in 2011, with both fixed-asset investments and consumption being key growth drivers.”

He expects the retail sector – backed by supportive government policies, favourable demographics and income growth ­– to outperform the overall economy. “Broadly defined consumption sub-sectors, such as entertainment, high-end consumption and healthcare, will experience further growth.”

In the meantime, Wang expresses concerns about inflation, rising asset prices and tightening monetary policies. He predicts China’s CPI will peak during May to July, before easing. He also expects policymakers to move proactively to deflate the property bubble.

“A tightening of monetary policy and further controls by the government are widely expected this year, with loan growth and rates policies the key levers, along with administrative controls as necessary.”

Wang believes the government is well equipped to combat inflation and tighten monetary supply – for example by setting loan quotas for lenders, raising interest rates and exerting price controls.

Among such tools, he sees loan quotas as most effective, while price caps are rather a symbolic measure that are unlikely to have real impact on company earnings. 

Meanwhile, he reminds investors that non-performing loans and asset bubble risks, although they’ve receded in the past year, remain underlying concerns not to be overlooked in 2011.

Commenting on Hong Kong, Wang says the real economy stands to benefit from resilient economic growth in China and an improving global environment.

However, he also says investors’ concerns over asset bubbles, the government’s reaction to hot money inflow and further measures to rein in property prices may dampen sentiment towards the equity market in the near term.

He notes that a combination of quantitative easing from the US and sustained economic growth backed by China means that the Hong Kong government will face the formidable challenge of managing potential asset bubbles.

Despite favourable supply and demand conditions, Wang expects policy headwinds to emerge in the residential property market this year following last year’s stamp-duty measures, although he expects “a solid year for retail and office-driven property prices given economic fundamentals”.

“As a result, we maintain our overweight position on the local property and banking sectors with the latter well-positioned to benefit from overflow loan growth from China as well as further RMB internationalisation,” he adds.

Across the strait, Wang expects Taiwan to present “a slightly more mixed outlook as external challenges and domestic opportunities unfold in 2011”.

In the export sector, Wang notes that Taiwan’s cost advantages are being challenged by China and that its global market shares in IT products are peaking, forcing Taiwanese technology firms to shift from low-cost manufacturing models to focus on building core competencies and differentiation in branding, product design and distribution.

On the other hand, Taiwan’s domestic sector will continue to benefit from warming cross-strait relations. Following the Economic Cooperation Framework Agreement, future cross-strait talks should increasingly focus on services sectors such as tourism and healthcare.

Companies with operations in China are likely to reap multi-year benefits from the increasing ease of doing business across the strait: Wang sees financials, transport and the retail sector as major beneficiaries. Stronger domestic consumption will bode well for both consumer staples and consumer discretionary.

JP Morgan Asset Management believes valuations in the Greater China markets are reasonable relative to growth opportunities, so it remains overweight Greater China consumption and continues to search for domestic-themed ideas that represent attractive risk-adjusted return profiles.

The current weightings of the firm’s Greater China Fund in China, Hong Kong and Taiwan are split 56%, 17% and 26.5%, respectively. But Wang warns investors to expect volatility in 2011, saying that timing will be tricky.

With China inflation anticipated to peak between May and July, he sees this as a good time to build positions since anxiety levels will be high by then. It may also be time to buy property stocks as governments introduce new administrative measures to curb property prices.