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Vanguard: China credit crisis unlikely

Chinese policymakers are capable of preventing a credit crisis, according to Qian Wang, senior economist for Asia at Vanguard Investments Hong Kong.

“A credit crisis is closely related to an economic crisis. We can’t say it is totally unlikely to happen [in China] but probably it is below 20% [in terms of probability] over the next two to three years because the Chinese government still has tools to stabilise the economy,” Wang told FSA.

For example, the government in April adopted a debt-for-equity swap programme, which could provide large companies mired in overcapacity a way to reduce their debt burdens, while banks are allowed to exchange bad loans for equity in companies they lend to.

A sharp rise in corporate bond defaults has triggered concerns over an acceleration in the deleveraging process in China. But Wang believes investors should not be surprised to see that China has accumulated a higher level of debt as economic growth slows.

“It should be viewed as good news to see an increase in corporate bond defaults, as China is trying to get rid of the unproductive part of the economy. Some of the zombie companies should be phased out. It is a natural adjustment in the economic cycle.

“If we start to see more defaults, that will probably shake investors’ confidence further. But the Chinese government is trying to prevent widespread defaults and bankruptcies in order to avoid a systemic credit crisis,” she said.

Herd mentaility

Investments in China should have a long-term horizon, she said. In the equity market, she expects a 10-year average return at around 6-9%, and the average of fixed income products to be 2-3%.

A herd mentality in regards to China equities — overallocation to new economy stocks and under-allocation to old economy companies — underscore the need for a long-term view.

“If everyone is doing the same thing, the valuation of those new economic stocks will become very expensive. That’s why we believe that investors should hold their stocks for the long term.” 

For 2016, Wang said she believes China’s economic growth will be at 6.6%, but it is expected to trend down to 5% toward the end of 2020. “The pace of slowdown will depend on how China is going to implement its reforms.”

Policymakers have been focusing on near-term growth stability. But after GDP growth stabilises, she believes China is likely to expect a U-shaped recovery.

Her view was shared by MUFG, who believes that a hard-landing scenario is highly unlikely in China.

Vanguard has 21 funds for sale in Asia, either ETFs or index-tracking funds, according to FE Analytics. 

It’s Emerging Market Stock Index fund has five Chinese companies – Tencent, China Mobile, China Construction Bank, Industrial and Commercial Bank of China and Alibaba Group — in its top 10 holdings. 

The firm said in May it is considering launching mutual funds as well as more ETFs in Asia.

Part of the Mark Allen Group.