Investors warn of bad debt pick-up in China

Stuart Park, head of Asian equities at Invesco Perpetual, and Michael Lai, investment director for Asian funds at GAM, said some of the lending agreements resulting from the Chinese stimulus could sour.

Parks described the bad debt pick-up as "inevitable".

But, according to Lai, it would be unlikely to precipitate another financial crisis. "We learned our lessons from the west," he said.

Lai said China had witnessed a steady expansion of credit since October last year.

"The M2 measure of monetary supply growth's been averaging 18-19 per cent. That's an increase on the low double digits of last year. We will only see the full impact of that in the second half of this year."

Partly as a result, the manager was confident the government would achieve its 8 per cent GDP growth targets.

Parks, who has 5-6 per cent of his Asian portfolio in Chinese banks, said the government had already financed a successful stimulus package with credit in the wake of the Asian crisis.

"Chinese economic growth in the 2000s was better than in a lot of Asia," he said.

But he said China needed to allocate capital more efficiently if the latest stimulus suffered the same bad debts as the first.

Areas of particular need included infrastructure in central China, where Mr Parks said companies were relocating at "stunning" speed, due partly to cheap local labour.

Although demand for raw materials had previously made infrastructure development expensive, the manager said many hard commodities, such as iron ore, copper and aluminium, now had fewer issues with supply and demand.

Elsewhere in the economy, he said domestic consumption was being maintained at reasonable levels and should expand over the next 3-5 years.

"Retail sales have stayed consistently high, but the hugely resource-dependent parts of the economy still seem to be in recession."

Many commentators have pointed out that, without better insurance, Chinese consumers are unlikely to spend more and save less for difficult periods.

Parks sees domestic insurers profiting from this phenomenon.

"You've got a population that is desperately underinsured, and the Chinese life insurers are likely to dominate the market for some time to come."

In the housing market, the government had taken measures to increase demand, according to the manager, but "if you looked at figures for affordability in China, you'd get worried", he cautioned.

Lai said property shares were now fair value at best, compared with the market as a whole, which was simply fair value.

"The opportunities to buy these companies were 6-7 months ago," he said.

"We are looking at industries that will face consolidation, such as autos and banking."