Three strong stocks from China

Professional investor Fen Sung still believes that China is in a strong position because of its huge fiscal surplus, and it will continue to be the manufacturing hub for the world. Here, he picks three of his favourite Chinese stocks.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Fen Sung, manager of the Premier China Enterprise fund.

September 2008 was the worst month I have seen as a fund manager. And not just because the MSCI China Index fell 20%, or because we saw the collapse of Lehman Brothers. For me, the most extraordinary event was when McDonald's debt was deemed more credit-worthy than the US government's.

What we are learning is how important the flow of liquidity is to the financial markets, and the role it has in economic growth. Just as the circulation of blood keeps us alive, so the flow of liquidity or cash is needed for global growth. Companies come to the markets to raise funds to expand. Yet now, getting a simple bank loan, let alone equity financing, is becoming very difficult. You only need to look at the spreads between prime rates and Libor (the rate at which our supposedly highly-rated banks can borrow at). If the big banks do not trust each other, what hope do companies have?

China has been far from immune to this credit crisis despite its limited exposure to sub-prime debt and corporate paper issued by financial institutions. The trouble is, half of China's exports go to the West and, while exports to emerging markets have grown, they cannot take up all the slack. So it is no wonder the Purchasing Managers Index fell below 50 in July and August this year (a figure of 50 or above shows that the manufacturing sector which accounts for about half of China's GDP is expanding). The good news is that this figure rose back above 50 in September, but I do not think it is champagne time just yet. We need to restore confidence in the financial sector for liquidity to flow again.

I still believe that China is in a better position than the West due to its huge fiscal surplus. While GDP growth will, in my view, probably be around 9.5% this year and 8% next year, this is still respectable when the West is on the brink of recession. A high fiscal surplus is beneficial at times like this. It has enabled China to, among other things, relax monetary policy and encourage lending to small businesses, and also increase export tax incentives for the textiles industry to boost growth and protect jobs.

This leads me to believe that China will continue to be the manufacturing hub for the world. As one of the biggest costs in manufacturing is electricity, and as coal will continue to be the main source of this, my first stock pick is China Shenhua Energy (HK:1088), a coal producer with its own transport network. This is imperative as China still needs an enormous amount spent on its rail infrastructure.

My second stock pick is EPURE International (SP:EPUR), a provider of water and waste-water treatment solutions in China. This sector has been neglected in the past it was unprofitable, with weak regulations discouraging proper waste-water treatment. However, China's 11th Five-Year Plan' involves changes to these regulations as well as huge spending in this sector.

My final stock pick is Shandong Weigao (HK:8199), a manufacturer of single-use medical products. China's health system is in the process of massive reform and the spread of disease through poor medical practices such as the re-use of syringes cannot be allowed.

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