China policymakers repeat same mistakes
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Philippa Yelland is a journalist with InvestorDaily, a Morningstar publication.
Policymakers in China are repeating the same mistakes and failing to understand longer-term implications of current policy responses, a major fund manager has said.
Schroder Asia-Pacific fund manager Robin Parbrook said the Chinese economy appears to be losing momentum quickly.
He said following visits to China by Schroders staff, "we've returned ... more cautious than ever and have not added to our China-related names."
Fidelity Asia fund portfolio manager David Urquhart agreed that market sentiment regarding China had "become noticeably bearish," as the market feared China growth was slowing, but he added that consumption-related data was a much more important indicator of Chinese GDP growth than previously.
Parbrook said stockbrokers were calling for "investors to buy China for forthcoming major stimulus measures - we take the opposite view".
This was because significant policy initiatives were unlikely due to an impending major transition in political leadership at the end of 2012, with most of the politburo and key decision-making committees stepping aside.
"Chinese markets only really do well in a high-inflation, high-commodity price environment in both a relative and absolute context," Parbrook said.
Chinese banks were struggling with liquidity shortages and rising bad debts," he said.
"They're not in a position or are not willing to lend to provide support for stimulus measures."
Demand for loans was expected to be low against a backdrop of years of "mal-investment" and overcapacity within a deflationary economy.
The 2008-10 credit-fuelled investment bubble was widely considered a mistake, and Schroders could not see the ingredients or appetite for a repeat of the same.
"We believe the key to any Chinese stimulus is in reality the property market - property and related activities easily surpass 20 per cent of China's GDP," he said.
With affordability issues and the property market bubble prone, Parbrook said the government would be loath to reflate this bubble.
Asked if China property was a major bubble waiting to burst, Parbrook said many cities clearly faced excesses and significant mal-investment, although broad affordability was not "scary" and income levels were rising quickly.
While Schroders did not see a complete collapse in the property sector, "we expect limited scope for a major stimulus," Parbrook said.
"In spite of weakness in Chinese shares, we've returned from these visits more cautious than ever and have not added to our China-related names," Parbrook said.
Urquhart said China was rebalancing its economy, and GDP growth was shifting from being heavily dependent on export growth and infrastructure spend, and towards domestic consumption.
As rebalancing continued, growth rates would be lower than the past decade, but China would shift to a more sustainable growth path.
The growth slowdown was stabilising at around the 7.5-8 per cent GDP rate.
"As GDP growth expectations have been revised down, the price-to-earnings (P/E) ratio of Chinese companies has also fallen to 8.3 times - comparatively cheap versus its five-year average of 12.1 times and also versus the Australian market on 11.2 times. Yet earnings per share (EPS) growth in China is expected to outpace that of Australia in both 2012 and 2013," he said.
As a result, Chinese shares that can deliver on current growth expectations are now looking attractive.
"The composition of Chinese GDP growth has already begun to shift. In the first half of this year, China's GDP grew 7.8 per cent, of which investment growth added +3.9 per cent. Consumption added +4.5 per cent (so over 57 per cent of GDP growth) while net exports subtracted -0.6 per cent. Only a few years ago growth was fairly evenly split between all three factors.
"Since the end of 2009 in the aftermath of the GFC (global financial crisis), net exports have not contributed to GDP growth. Weak external demand from the US and Europe has removed this previously strong GDP growth driver."