A few years ago I wrote in this column that one of the best reasons to buy into Japan was because it was "the China play." China's new manufacturing plants needed both basic materials and sophisticated machinery, so ship loads of steel, machinery and electronics were pouring out of Japan and into China.
At the same time Japan's consumer goods companies weren't being slow about taking advantage of the rising incomes of the new Chinese middle class: skin creams, soaps, mobile phones and Honda motorbikes were all headed for the mainland too. In total some 40% of good exported from Japan were ending up in China.
None of this has changed (the Japanese and Chinese economies remain just as entwined) but something else has. Japan's domestic economy has recovered so substantially (wages and property prices are on the up, consumer confidence is at its highest for 15 years and deflation appears to have come to an end) that buying into Japanese equities is no longer about investing in Chinese growth but about investing in Japanese growth at home.
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The other obvious China play over the last two years has been commodities buying oil and metals has been a fantastic way to gain exposure to China's fast growing infrastructure and manufacturing industries. But this too is not as good a play on China as it was a few years ago: the commodity markets have risen a long way very fast metals prices are up 100% odd in the last three years. While I think this is all part of a long term super cycle that we should be invested in, it does mean that prices are currently extremely volatile and that the markets are not for the nervous.
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Yet while these two obvious China plays are not quite as good as they once were, the Chinese economy is still looking just as good if not better as it was two or three years ago. China is growing at not far off 10% a year, its trade surplus with the rest of the world is over £50bn and its population is showing little sign of slowing down either when it comes to working or consuming.
So where do we now invest to take advantage of this? It would be wonderful to be able to point to the Chinese market itself but I'm afraid that I can't. The Chinese authorities may wish it wasn't so, but there is no getting away from the fact that their stock markets are a bit of a mess.
Thanks to a trying lack of transparency, a huge overhang of government owned stock, and a confusing system of several different classes of shares, Chinese shares have fallen well over 40% in the last five years. They have picked up a little this year amid a government propaganda drive (we are told, for example, that the overhang is to be sold down) but the basic problems remain exactly as they were.
The result? Chinese-listed shares are not so much a play on the massive growth in the Chinese economy but on as on the possibility that its operations may be reformed, something I'd rather not bet on for now.
However there is a market just a short distance from mainland China that I think might be worth betting on as a China play: Taiwan. The Taiwanese market has not been much of a performer recently (it has risen only 9% in the last year, significantly less than most Asian markets.
However much of its underperformance can be put down to one thing political tension with China. And that may not last much longer: while is true that the Taiwanese and the mainland Chinese are famously not very friendly (there are no direct flights between the two, making what should be an hour long flit across The Taiwan Strait a marathon day-long journey via Hong Kong or Singapore), there is a growing feeling that a political solution to the sovereignty issue is in sight.
Right now Taiwan is run by the DPP which is, while moderate, very supportive of Taiwanese identity and sovereignity. However the main opposition party - the KMT is considerably more China-friendly (in April 2005 its then leader Lien Chan actually shook hands with Chinese president Hu Jintao) and is widely expected to win Taiwan's next election in 2008.
If it does, there is every expectation that the sovereignity issue between China and Taiwan will be either defused or indefinitely delayed without much in the way of friction. Analysts at Asia specialist broker CLSA say that this would mean the two countries would quickly make "significant material progress on permanent direct links".
In turn this would hugely accelerate the rise of trade links between the two and precipitate "a major bull market in Taiwan", similar perhaps to that that got underway post-1984 in Hong Kong. CLSA's Christopher Wood points out that the population shares a common language with China and is separated from the mainland in parts by water only 100 miles wide. He believes it could soon be " the world's next big China play."
The other piece of good news here is that Taiwan is still a relatively cheap China play. The 72 stocks followed by CLSA have an average p/e of around 12 times despite the fact that corporate earnings are forecast by Citibank to rise over 20% this year and the market as a whole yields over 3.5%.
There are numerous individual stocks listed in Taiwan that will give you good exposure to China but probably the best way in for UK investors is via an exchange traded fund such as the recently launched MSCI Taiwan iShare. This can be bought through your stockbroker just like any other share but will track the progress of the Taiwanese market as a whole. I think it's one for this year's ISA.
First published in The Sunday Times 12/02/2006
