China promises a very positive long-term outlook for investments, but there are risks of short-term volatility according to AGF Funds.

In a Web cast yesterday, AGF said China’s strengths include its population. At 1.2 billion, China represents 20% of the world population. Already, China is the second largest economy in the world on a purchasing power parity basis. It is now the largest consumer of copper, tin, steel, cotton and zinc, and is the second largest consumer of many others such as energy and aluminum. And, its’ GDP is forecast to grow by a world-leading 7.5% in 2004.

AGF said the risks for investors in China include: the potential for currency appreciation, if China were abandon the Yuan’s fixed exchange rate against the U.S. dollar; the fact that financial institutions are state-owned and state-operated, and their loan losses are high; limited stock market liquidity, including restrictions on foreign investment; and the high valuation of Chinese stocks.

AGF proposes two strategies for investing in China: directly, through a couple of its funds; or indirectly through funds that buy companies that are exposed to China directly and indirectly.

AGF has two funds that invest directly in Chinese companies: AGF China Focus Fund and AGF Asian Growth Class.

Speaking with InvestorCanada.com, Stephen Way, VP and portfolio manager at AGF, discussed the driving force behind growth in China last year and looks ahead to 2004. Way manages several global equity funds for AGF, and he is the primary link to the manager for its China Fund, Nomura Asset Management. The portfolio manager on the China fund is Raymond Tse, who is based in Hong Kong.

Way said that explosive growth in China has been balanced between domestic consumption and infrastructure investment. While he expects a slowing from 2003, Way still anticipates growth in the 7% to 8% range in 2004.

He said that AGF’s China Focus Fund is looking at several major investment themes in China. “One is domestic consumption and in that area, we’re particularly excited by the auto sector.”

“A second theme that we have in the fund is infrastructure investment. In those areas, we’re looking at things like toll roads, the building and maintaining of toll roads, the operation of toll roads and also utilities,” he said.

“We’re also investing in the resource theme,” Way reported. “Resource, of course, is not just a China story. It’s a global story. If you look at the marginal demand that China is putting on resources globally, whether it be copper or iron ore, lead, zinc, all kinds of different quantities are in high demand in China and that’s certainly a good theme for us in the portfolio.”

Way says that he is not expecting a revaluation of the Yuan in 2004, but that the currency will likely have to float free at some point. He says that a re-valuation could occur in 2005, once the banking sector is in better shape.