Templeton's Yang likes China infrastructure plays

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By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) -- Judging from the air quality around Beijing, the rebound in the world's fastest-growing major economy is well on track, according to a top Asia fund manager.

"The air is really bad, it's sort of like we're back in 2007 or 2006. There is a lot of activity going on," Guang Yang, lead fund manager of the $850 million Templeton Global Opportunities Trust, said in an interview.

While the haze is a reassuring sign that things are getting back to normal in China's capital, some observers worry about the pace of the bounce-back. Monetary stimulus that helped fire up Chinese steel mills and clog up traffic has also had reverberations in the stock and real-estate markets.

Stocks in particular have drawn concern. The Shanghai Composite Index -- which rose 90% between October and early August -- spent last week swinging between massive gains and losses, as investors worried Beijing may tighten up on its recent lending spree and send money rushing out of the stock market.

But Yang says despite Shanghai's 13% retreat so far this month, equities remain a good bet for those with a long-term horizon. His fund has an 11% exposure to China.

In particular, Yang advises positioning for China's shift towards domestic-consumption-led growth and away from export dependency, partly a result of the global financial crisis.

Targeting China's domestic consumption story is not exactly new, but the theme has drawn increased interest since Beijing unveiled its $585 billion infrastructure-spending plan designed to keep millions of workers employed.

Tapping into 'China power'

Independent power producers rank among the best ways to leverage China's growth, Yang says. Consumers, many buying washing machines and refrigerators for the first time, are stoking electricity demand at a factor 1.2-times the rate of economic expansion.

"One of the best ways to play on a county's GDP growth is to buy power companies," he said.

Electric utility China Resources Power Company /quotes/comstock/22h!e:836 (HK:836 19.82, +1.04, +5.54%) , for instance, ranks as the fund's largest single holding at 2.7%.

The outlook for makers of electrical-generation equipment is also favorable. Yang cites Shanghai Electric Group /quotes/comstock/22h!e:2727 (HK:2727 3.52, -0.07, -1.95%) , saying the company is morphing in a Chinese version of the German industrial giant Siemens.

"They are on a very fast learning curve and able to provide some of this equipment at a very good quality but with a very good price," he said.

Another of Yang's China strategies involves taking advantage of long-term currency trends.

Consider China Mobile Ltd. /quotes/comstock/22h!e:941 (HK:941 79.05, -0.95, -1.19%) /quotes/comstock/13*!chl/quotes/nls/chl (CHL 51.33, -0.54, -1.03%) , the world's largest wireless service provider by subscribers. The company's revenues are denominated in yuan, but much of the gear it will buy in coming years to build out its third-generation network will be sourced from overseas and invoiced in U.S. dollars.

"You want to buy companies whose revenue is in local currency, but ideally their outlays are partly in U.S. dollars," Yang said.