Maybe China will suffer a debt crisis and a ‘hard landing’ of its economy – and maybe it won’t. Either way, there are ways investors can benefit, particularly in domestic stock markets as reformers in Beijing widen the scope for foreign capital inflows.
Independent strategists tipped technology and the financial sector as likely winners from reforms led by the government. They spoke at an event organised last week in Hong Kong for investors by the Asian Association of Independent Research Providers and moderated by Jame DiBiasio, editorial director at Haymarket Financial Media.
Some analysts remain concerned that China’s debt imbalances pose a danger. “There will be some form of debt crisis,” said Freya Beamish, economist at Lombard Street Research.
Chinese corporate debt now accounts for 8% of GDP, of which 3% is held by foreigners via offshore renminbi positions.
This growing debt would be tolerable in the days when it was outstripped by economic growth, but that is no longer the case. With high domestic savings, there is a limit to how much the government can stimulate the economy via consumption. That growing debt pile reflects a need at the macro level to seek liquidity from abroad, Beamish argued.
Other analysts did not agree with her bearish prescription, but acknowledged the economy does face serious imbalances. Mehran Nakhjavani, a Canada-based partner at independent research firm MRB, said shadow banking and property bubbles were symptoms, not causes, of strife.
He said the number-one issue requiring reform was financial repression, but expressed optimism that China’s government is gradually coming to grips with this.
“[Policymakers] recognise that financial repression needs to an end,” he said, citing measures to ease capital controls such as supporting the dim-sum bond market, launching the financial free-trade zone in Shanghai and deregulating interest rates. “These problems won’t go away in the short term, but policymakers are addressing fundamental problems."
Paul Schulte, who runs his own research firm in Hong Kong, was bullish on China’s prospects. He pointed to the ever-narrowing spreads on Chinese bonds as a clear indicator of investor confidence.
He dismissed fears of destabilising Chinese outflows as currency controls loosen, noting the massive extent to which mainland individuals and companies have already found means to acquire offshore assets – and the desire among global investors to buy Chinese securities once they are allowed.
Nakhjavani said China’s financial sector is a winner from reform. Easing regulation on areas such as IPOs, privatising state-owned enterprises and introducing municipal bonds will all create opportunities for finance companies to boost earnings.
The Shanghai free trade zone is expected to allow innovation that will further benefit some financial companies, such as introducing derivatives trading, he added.
Schulte argued that investors should buy technology firms, particularly as they move into financial areas. “Buy the servers,” he said.
E-commerce companies Alibaba and Tencent are winning major market share in the local banking market. They are the leaders in helping Chinese finance develop a proper credit system. And investors would do well to follow their leader.
For example, Jack Ma, founder of Alibaba, is in the process of acquiring more than 20% of Hundsun Technologies, a Chinese data provider. Hundsun provides software and network services to much of the financial sector. This acquisition will give Alibaba, already the country’s biggest e-commerce player with burgeoning positions in payments and asset management, access to financial data about all of its customers.
Schulte said China is the only big emerging market that offers investors both growth and fundamental reform.
Out-of-favour sectors can also throw up appealing opportunities. Nakhjavani said property developers as a class may be unattractive, but those with the right government relationships, a favourable replenish ratio and land banks in growing cities should fare well – at a time when valuations of Chinese equities remain cheaper than most other big markets.