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By Jason Stipp | 07-20-2010 03:54 PM

China's Next Growth Story

Matthews China manager Richard Gao says the fund is tracking the evolution of domestic consumption in the country by focusing on banks, insurance, luxury goods, leisure, and information technology.

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MCHFX Matthews China Investor

Stipp: When you're thinking about the companies that you're investing in, in China, how do you factor in the possibility for either slower growth or inflation, and how do you find companies that can weather through an environment that maybe China is facing?

Gao: I think, China is today facing a very different challenge than the last year. The overall growth has been very strong so far this year, and last year, it was all about how to boost the overall economic growth in China.

And then the government laid out this stimulus program to try to stimulate the growth, and that stimulus program has been working very well. And in fact, it's been working too strongly that the government wants to slow it down.

And when you look at the inflation rate, although the absolute inflation number is still not that high, it is currently at around 3%, and that is also the target for the government of this year that they want to achieve the inflation rate of 3%. But, if you look at the momentum of the inflation growth in China, it's actually last year, it's in the deflationary period. And this year, you already see a 3% inflation. So that has caused us some concern about the rapid growth rate of inflation rate.

But on the other hand – on the more positive side, we are glad to see that the government has actually treated this scenario very seriously, and they realize the problem of overheating and inflation in the future, and they have been rolling out a lot of tightening measures especially in the property areas, and also rolling out measures such as raising bank reserve ratios, and also slowing down loan growth. So we are cautiously optimistic that the government should be able to achieve a soft landing in the second half of this year.

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