Embrace the bull in the China shop

A rise in negative investor sentiment towards China ignores a number of stronger positives and the long-term investment case remains firmly intact, according to Investec Wealth & Investment.

Embrace the bull in the China shop

The thrust of most negative reports focus on six key issues: that China has grown at an unprecedented rate; has a lot of debt; struggles with corruption; has unreliable statistics; is suffering a growth slowdown; and, because of its size, if it goes wrong could be a real problem for the global economy.

However, Investec says China is fully aware of its challenges and that the current slowdown is largely self-engineered by the new leadership, whose efforts to rein in lending and tackle corruption have imposed a significant austerity burden on growth – estimated by Investec as over 3% of GDP.

As China ‘cleans house’, Investec says bankruptcies and insolvencies will increasingly be part of the regular news-flow from China – but this is a sign that markets are being allowed to work, not a harbinger of imminent disaster.

Current concerns over the “shadow” banking system in China have a high profile because their products have been sold to consumers, but the sector is a small part of the overall debt burden, according to IW&I.

The wealth manager says only a small fraction of investment over the past five years has been in ghost cities or corrupt projects; a good deal has been in productivity enhancing infrastructure, including housing and transportation.

To the extent that it has been in ‘bad’ assets, these have largely been sponsored by regional/provincial governments whose credit will ultimately be supported by the remarkably solvent central government.

The rise in China’s debt over the past five years has in fact predominantly come from the corporate sector – largely a function of loans to state owned industry. Once again, this is government debt by another name and the Chinese government is “good” for its debt, believes Investec.

“China has a lot of debt – the total burden of public and private sector debt has risen from around 150% of GDP to over 200% of GDP since 2008,” says John Haynes, head of research, Investec Wealth & Investment.

“But the country also has a lot of assets, even beyond the $3.8 trillion of foreign exchange reserves, which amount to around one-third of GDP.

“For a crisis to develop, either politics or the financial system must be unstable.

“Neither is the case in China.

“Many China watchers appear to be confusing the signals generated by a necessary tightening of control in the financial sector with an imminent crisis. We think this will prove to be overly pessimistic. We are not factoring-in a China ‘surge’ in our positive investment outlook for the year, but simply a stabilisation.

“Since we think China is in control of its own destiny, to us this seems like a modest expectation.”

Enter your e-mail address to receive updates straight to your inbox

My Newsletter

You can easily unsubscribe at any time by clicking on the unsubscribe links at the bottom of each of our emails

About Author