There have been plenty of dire warnings about China and its financial markets, but there are reasons to think those jeremiads lack credibility, an investment firm says.
An investment firm is happy to sing a “boring” song about China, but hopes this will be music to the ears of investors who have had a gutful of excitement about world affairs in 2016.
Matthews Asia, the San Francisco-headquartered asset manager that focuses on Asia, as its name implies, is not one of those players expecting the world’s second-largest economy to blow up any time soon, or add to the litany of financial shocks that have roiled the world in recent years.
In a recent briefing for journalists, Andy Rothman, investment strategist, said that while some statistics on China such as debt-to-GDP ratios and concerns about sectors such as wealth management products have encouraged fears about the country, these worries are largely unwarranted.
Rothman spoke at a time when much of the world’s media and investment communities have been fixated with Brexit and the recent US elections, but there have also been concerns over how fragile, or robust, China’s economy and financial system are. GDP growth in China has decelerated from its pre-global financial crisis peak, and is now coming in at around 7 per cent. The protectionist rhetoric of Donald Trump, the president-elect, has also stoked concerns.
Responding to the Trump/protectionist issue, Rothman said the effect on China from tariffs, while negative, would need to be seen in the context of how only a small share of the country’s GDP is based on net exports (about 4 per cent). And about 10 per cent of Chinese exports go to the US, he said. Rothman also noted that a report in 2011 by the San Francisco Fed picked up on how less than 3 per cent of personal consumption expenditure in the US went on Chinese imports.
There are other reasons to believe that China’s economic story will not be as bumpy as some fear, Rothman said. The debt problems of China are to a large extent focused on corporates and the government, rather than households, as was the case in countries such as the US and UK, he said.
Small and medium-sized enterprises employ 80 per cent of all workers in the country. “State firms are a disaster in many terms but they are a narrow slice of the economy,” Rothman said. China’s centrally-organised country can take a “surgical” approach in cleaning up the bad debts of its state-owned enterprises and shift bad loans to a “bad bank”, enabling a reformed economy to continue growing. It can afford to be radical in a way that, say, the US could not afford to be after the financial crisis, he said.
State-owned enterprises face a challenge in shedding jobs and getting out of unprofitable business areas, he said. “This is the biggest challenge for the Chinese government…what to do with workers being employed by bankrupt companies,” he said. He noted how in the “rustbelt” of northeastern China, which accounts for 16 per cent of the country’s population, millions of workers have been laid off in sectors such as heavy industry, and that this process was handled relatively peacefully.
China has been proactive in dealing with issues, such as abuses in the trusts industry – imposing controls quickly in 2014 – and, more recently, dealing with abuses in wealth management products and areas such as peer-to-peer lending, Rothman continued.
In housing, fears of a bubble emerging appear unjustified, Rothman said, arguing that levels of leverage are far below the position seen in the West before the 2008-09 crash. In 2015, Chinese authorities trimmed the requirement on collateral on a loan to 20 per cent from 30 per cent, but this is still far above the puny median figure of 2 per cent seen in the US in 2006. “This situation is dramatically different from what we saw in the US,” he said.
The major issue for property in China is social: the fact that many people, such as young adults, cannot get on the housing ladder, he said.