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.

Video Archive...

Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3
20/07/2017  Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2
13/07/2017  Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1
06/07/2017  Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared
How to guard against retirement threats
16/06/2017  As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US.
PIMCO Global Credit Fund
07/06/2017  The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team.
PIMCO Income Fund
07/06/2017  Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy.
3 pockets of opportunity in fixed income
07/06/2017  The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space.
Trump administration biggest macro threat for investors
05/06/2017  Even as European political volatility subsides, the US Government remains a considerable threat to financial markets, says Colleen Barbeau, director of equity portfolio management, Franklin Templeton.
Antipodes Global Fund: Class P
01/06/2017  Antipodes constructs this portfolio based on three major objectives--capital preservation, inclusion of attractively priced businesses, and investment resilience.
Investors Mutual WS Future Leaders Fund
01/06/2017  Investors Mutual Future Leaders is a capable strategy focused on investing in Australian companies outside the top 50.
Why the time is right to invest in India
25/05/2017  Indian stocks rallied after the appointment of Narendra Modi as Prime Minister--but then subsequently fell. UK-based investment manager Jonathan Schiessl says now is the time to buy.
When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.