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Slower Growth is China's 'Goal'; Buy Banks, Property: Expert

Wednesday, 13 Jul 2011 | 1:12 AM ET

As stronger than expected second quarter gross domestic product (GDP) numbers from Chinaquell fears of the country's growth slowing down, one analyst says now is the time to invest in China's "consumer story" with banking and property stocks attractively priced.

Vegetable market in Zhengzhou, Henan Province of China
Getty Images
Vegetable market in Zhengzhou, Henan Province of China

Simon Grose-Hodge, head of investment advisory at LGT Bank Singapore, tells CNBC that he doesn't see a major risk in terms of the amount that banks lend to government
institutions in China.

"With the banks trading at these levels, a lot of it is already priced in," he says.

Figures released last month by the country's national auditor showed local governments ran up to $1.6 trillion in debt over the past decade, which is equivalent to one quarter of its annual economic output.

While Grose-Hodge thinks the volume of bad debts will continue to rise, it's unlikely to pose major problems for the economy.

"If you look at it at a global scale, anything that's a fraction of GDP rather than a multiple of GDP is really not something to be concerned about in the current environment," Grose-Hodge says.

Agricultural Bank of China, one of the country's big four lenders, said on Tuesday that it expects its first-half net profit to rise more than 45 percent helped by a widening net interest margin and growth in fee income.

"It shows that the banks still have an awful lot of performing loans and they're making very good margins on those loans," Grose-Hodge says. "It's enough to sustain the profit growth."

The Chinese government is at the end of its tightening cycle, according to Grose-Hodge, who expects tax cuts coming in September to boost the banking and property markets.

"They need to keep that growth going fairly strongly, they need to keep the employment going and that's why we think they they're not going to run the risk of over-tightening particularly when you look at all the problems we got in the rest of the world."

Amid fears of a hard landing, China's economy grew 9.5 percent in the second quarter from a year ago, just below the 9.7 percent growth seen in the first three months of the year; but still higher than market expectations of 9.4 percent.

"One important thing to remember is Chinese policy, slower growth is actually a goal rather than a problem, so these are certainly not numbers that are going to be any cause of concern," Grose-Hodge says.

He advises that stocks that have high dividend yields and growth potential are going to be in demand, because they offer a defensive area of the market to invest in the current period of global uncertainty.