China's debt is not a problem

Emma Wall  |  15/04/2016Text size  Decrease  Increase  |  

Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Doug Turnbull, Manager of the Neptune China Fund. Hello Doug.

Doug Turnbull: Hi Emma. Wall: So things are looking pretty positive for China, we have not been able to say that for a while. The Shanghai Composite is above 3,000. What's caused this to bounce?

Turnbull: Well, without wanting to kill peoples' optimism. I would, first of all, say don't look at the Shanghai Composite. This is not really a stock market in the same way we understand them elsewhere. It's not a discounting mechanism of future profitability. It's much more a gauge of domestic retail investor sentiment and given the amount of involvement that the Chinese authorities have in this market trying to control it. I'd say it's a pretty broken market. It's giving a pretty misleading impression. However, you are also right, things are looking a little bit better in China. Actually, the picture of the longer term has been bifurcated. And it's been bifurcated for a long time. Old China, you think the heavy manufacturing, that old low-cost, built-for-export model. That's been doing badly for a long time. That's been either flat or sometimes in recession. Whereas what I'd call new China a more consumer-driven economy is growing really quickly. Retail sales are growing at 10 per cent. Think car sales growing at about that level, plane tickets growing at 15 per cent a year. The number of packages being delivered around China. That's growing at 50 per cent a year. New China's actually looking pretty good.

Wall: And of course all of those are investment opportunities?

Turnbull: Absolutely. There is a lot of good long-term structural opportunities in there that can quite often get masked by people focusing just on the old. Seeing it breaking down and extrapolating that out for the whole economy, which is really misleading.

Wall: And what about the currency then, because there's been some movement against the dollar? Actually, the Chinese currency is looking pretty positive.

Turnbull: The authorities have really stepped in, in order to stabilise the currency. With over US$3 trillion in FX reserves they have got the fire power to do so.

Wall: Talking about the economy we've had some figures from the IMF recently saying that actually on the short term, doesn't mean that they are going to have a hard landing. China growth looks good. But on the longer term there are some concerns about debt levels.

Turnbull: Yeah, absolutely. So what they have done in the short term, is basically put in a bit of a floor to the growth and we think 6.5 per cent is currently the minimum growth level that policy makers will accept. If it dips below that, which it did later in last year according to our numbers, then they'll put a little bit more support. We've seen that in terms of some more liquidity coming into the economy. We've seen that in terms of planned fiscal expenditure starting to pick up. Now that in and of itself is a short-term positive. Could there be long-term negatives attached to that? Possibly. However, those negatives are really tied up in the amount of debt. China's debt at an aggregate level is not too scary, but it's certainly high. It's around 250 per cent of GDP. However the detail, the nuance of that is actually much more important than the aggregate. It may not provide such exciting headlines but actually digging down into that detail is where we find the facts. And that is that Chinese debt is very, very concentrated. Something like 45 per cent of loans all to the property and property-connected sector. Actually the household is massively underleveraged. Debt to income in Chinese households is about 60 per cent, that's under half the level we have in the UK. Likewise, government debt at about 55 per cent of GDP is really low for pretty much any large economy. Also, the private sector has very limited levels of debt, it's very concentrated in these big ugly state companies and a lot in the real estate sector.

Wall: Doug thank you very much.

Turnbull: Great pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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