Latest figures released by China’s statistics bureau showed that the economy improved in the last three months. This is down to mainly a string of mini-stimulus packages that boosted economic growth.
Although at the start of the year the government seemed to be preparing markets for a growth target below 7.5%, towards the half year as series of measures were introduced that helped the economy to grow 7.5% in April-June compared to last year.
“Overall, the strengthening of Chinese growth gives us little cheer, given its roots. The change of tack from policymakers prompts increased misgivings about China’s economic future. It could all too easily be a case of short-term gain, long-term pain,” Schroders emerging markets economist Craig Botham said.
“Stimulus measures have included targeted cuts to the reserve requirement ratio, relending by the central bank and tax cuts. The combined impact has been to stabilise most measures of activity, with industrial production, investment, credit growth and exports (also helped by robust European and US demand) all halting their recent declines,” he added.
But despite better than expected growth numbers, investors are advising caution about China.
Political landscape
The picture suggests underlying issues, says Mark Williams, chief Asia economist at Capital Economics.
“Investors in China’s market did not do well last year, suggesting structural problems in the equity market,” he said.
One of these problems is the impact of state-owned enterprises (SOEs), heavy-weights in the market that are holding up profit-making opportunities for investors. These SOEs are not concerned with boosting dividends for shareholders. But there are other options.
One opportunity opening up for investors is IPOs.
“We’ve seen a rise in IPOs, which had stalled last year. But investors are cautious across the market as a whole. It’s a high-risk environment,” Williams added.
Botham remains cautious on the current playing field for investors.
“Overall, the strengthening of Chinese growth gives us little cheer, given its roots. The change of tack from policymakers prompts increased misgivings about China’s economic future. It could all too easily be a case of short-term gain, long-term pain,” he said.
Looking ahead, he added the new policy stance would suggest continued stimulus efforts to support growth at current levels. Nevertheless, he finds it difficult to be overly optimistic.
“Resorting continuously to credit stimulus will only exacerbate financial fragilities and raises the likelihood of financial crisis in future years. In particular, expanding credit by loosening criteria for the loan to deposit ratio seems guaranteed to lead to a worsening of asset quality, and the move to exclude foreign denominated loans and deposits from the ratio seems tailor-made for generating a currency mismatch problem,” he said.
Equities
For emerging market fund managers, Chinese equities have generally lost their lustre and even become negative contributors to the fund.
Nick Price, manager of the Fidelity Emerging Market Fund, is not “overly concerned” about China but he has reduced his exposure.
He does not have exposure to Chinese banks and property because there is a lot of guess work involved with financial and real estate stocks.
“The market is incredibly competitive and you need to find the opportunity,” he said.
The total contribution to the fund’s performance of the Chinese stocks he currently holds has gown down in the last quarter. In the three months to 30 June, Mengniu Dairy, China’s largest dairy manufacturer, went down 35bps. Car manufacturer Great Wall Motor’s declined by 43bps while the contribution of education service provider New Oriental Education & Technology Group went down by 27bps.
“The economic risks to China certainly remain and certain opaque elements, particularly in the banking and shadow finance sectors, deserve a great deal of investigation,” according to PSigma’s chief investment officer Tom Becket.
However, he added that writing off China would be a “perilous move”.
“Ignoring the deep contrarian value opportunity in certain Asian value prospects would be an easy mistake to make. Particularly when other opportunities to make attractive returns in the next few years are so scarce.”
Shot-term stalling
Market sentiment about China is hovering at a low point, despite better than expected growth figures for the second quarter. Investors are still keeping some exposure to China in portfolios, but many are cutting back. On the long-term horizon the market is positive on expected returns, but going into the second half of the year investors are exercising caution.
