The Chinese Government has taken steps to insure their economy against risks from continued accelerated growth and to reduce corporate debt levels, but China is still full of buying opportunities, according to Nikko Asset Management.
China has changed its economic strategy from an unconstrained, ‘go for growth’ model that is typical of many emerging Asian nations, to a stricter and more conservative growth model. Rob Mann, senior portfolio manager at Nikko Asset Management, said China was concerned that going for growth and adding on more leverage would accumulate problems for the long term.
“Everyone is talking about stability, and stability in China used to be to grow as quickly as possible to keep the people happy. Stability now means don’t let credit grow too quickly else you’ll cause a financial bubble that’s going to burst and cause problems,” he said.
“So, stability actually means tighter liquidity and higher interest rates. China is thinking longer term about keeping the country stable and that they can’t let excesses develop.”
Beijing has a history of financing inefficient state-owned enterprises, which have crowded out the private sector, but recent guidelines released by the China State Council have outlined strategies to reduce rising corporate debt levels and to encourage borrowing arrangements to be handled by the private sector.
Mann said last week that: “They [Beijing] know that too much debt is a problem, but they’ve got a plan… Number one, convince the banks that GDP is not going to grow as fast as in the past; Number two, slow down the growth of credit to GDP; Number three, get the private sector to take care of borrowing rather than government sector and; Number four, allow more bankruptcies and implement proper marketplace rules to get rid of the excess debt that is causing problems. It’s sensible.”
Chinese large-cap companies will be a good investment as the economy transitions. Companies like Tencent and Alibaba have strong business fundamentals, and if China experiences a downturn off the back of the recent economic reforms, they could present an opportunity to buy at a discount.
Another performer in the Asian markets will be India, who are positioned to see a long period of economic growth, similar to where the Chinese economy was positioned before experiencing their long period of growth. Mann said to look to Indian equity and infrastructure for opportunities.
“Another huge thing in the Asia Pacific region is Indian demographics. In 2015, 33 per cent of the world’s 20 – 40 year olds were Indian. In 2025 to 2030, 78 per cent of the increase of the world’s 20-40 year olds will be Indian. That is a significant part of the global workforce,” said Mann.
“If you look at India in 2015 against China in 2000, the situation is remarkably similar. Things like percentage of urbanisation, percentage electrified, market capital and several other factors, are almost exactly the same.
“The recent elections in India have shown that traditionally the Prime Minister got elected by promising a lot of money to the poor, but he [Prime Minister] did this ‘demonetisation’ policy where he removed a bulk of the notes.
“To me, it was badly executed and a lot of people were hurt buy it, particularly the poor who didn’t have bank accounts. But come the next election, he did really well, so the electorate has essentially said they are going to vote for reform.
“You’ve got a country that is voting for reform, you’ve got a prime minister that has learnt that reform is supported even if you muck it up.
“When I think about Asia over a 10 year period, I recommend watching India, because for the world India will be really important. Equity will be the asset class driving strong growth, it’s an equity story, but infrastructure will also be a good place to be.”
