Star UK fund manager Anthony Bolton and colleagues at Fidelity International are predicting a pick-up in Chinese domestic consumption as the nation nears the end of its monetary tightening cycle.

Consumer-price inflation (CPI) typically trails monetary policy by six months, notes Raymond Ma, portfolio manager of Fidelity’s China Consumer Fund. “If the tightening circle is coming to an end, CPI will come down and softening CPI is good news for consumption,” he says.

He was talking in a panel discussion at Hong Kong’s Shangri-La Hotel alongside president of investments Bolton and Martha Wang, portfolio manager for Fidelity’s China Focus Fund.

“I believe the concerns on China inflation might be over-done as CPI in China is getting to its peak and will roll over,” suggests Wang.

Bolton himself notes that although there may be more rate hikes this year, China is inexorably moving towards the end of its tightening cycle, prompting a recent pick-up in market sentiment.

Bolton landed in Hong Kong last spring to manage the Fidelity China Special Situations Fund, a UK-registered fund focused on sectors that he sees as future growth-drivers as identified by Beijing in its latest five-year plan: consumption, services and high-value manufacturing.

“I have decided to focus particularly on sectors that are going to be the growth drivers of the Chinese economy over the next 10 years, and that takes me into the domestic economy, consumption and services, and away from international exporters,” he reiterated yesterday.

Bolton suggests that the global financial crisis was a catalyst to make China realise the cost of its export-driven model, compelling it to focus on becoming more self-reliant.

“The days of China being the manufacturing base of the world are coming to an end, and the Chinese authorities don’t want to play that role,” he noted. “That is one of the factors driving the latest 12th five-year plan, moving towards improving individual consumption.”

To aid this economic transition, Bolton believes China would benefit if it shifted more jobs from the low value-added manufacturing sector to the services area.

“What’s so exciting about China is that you are getting it at the early stages of the ‘S curve’,” he adds. “It’s never happened on this scale. It’s like Korea or Taiwan or Japan 20 or 30 years ago.”

The “S curve” refers to the concept that when an economy’s GDP per capita passes $1,000, higher average incomes change demand patterns and push the nation into a new phase of high-growth economic development.

But Bolton notes with some caution that a huge number of recently built apartments in China are currently sitting empty, with developers having funded this expansion on a big pile of credit. “I have a bias against property developers and I am quite happy that my portfolio has minimum exposure to Chinese developers,” he reflects.

But while Fidelity’s investment team believes positive projections for RMB appreciation are on the mark, it is less excited about Hong Kong’s first RMB-denominated IPO of Cheung Kong’s Hui Xian Reit, which seeks to raise up to Rmb11.16 billion ($1.7 billion) and is due to start trading on April 29.

Bolton suggests demand for the listing is largely driven by the shortage of RMB-denominated assets available in Hong Kong. But sees the currency denomination as “immaterial” in terms of RMB appreciation and prefers to focus on identifying stocks with exposure to China’s growth story.

Overall Fidelity’s China team manages $20 billion invested in Chinese securities.