EquitiesJul 15 2014

Fidelity’s Nicholls urges China to act on banking concerns

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Fidelity’s Dale Nicholls has said China’s government needs to act on the rising level of non-performing loans as the issue is a key factor holding the market back.

Mr Nicholls, who formally took on responsibility for the China Special Situations trust from Anthony Bolton in April, said the level of non-performing loans in the Chinese economy was “heading up” and that he expected the real level of these debts to be higher than the official figure.

While many stockmarkets have produced gains in the past five years, the Shanghai Composite index has lost 31.1 per cent in sterling terms in that timeframe, according to data from FE Analytics.

The potential for slower economic growth has been an issue for some investors but Mr Nicholls cited so-called shadow banking and the rising level of non-performing loans, e.g. those unlikely to be paid back, as a “key concern” holding markets back which needed to be tackled by the government.

“People are looking for the government to take action in recognising the issue and write off some assets,” he said.

“I think the next 12 months will be pretty interesting. The total social financing figure tries to factor in all lending and with some of these [non-performing loans] maturing what we are hoping to see is some of them getting written off.

“What the market needs is progress and it needs something to happen because it is holding the market back.”

He added non-performing loans were estimated to be at 1 per cent of assets for a large group of banks but suspected the “true number is north of that”.

Since taking the helm of the trust, the manager has further increased the underweight to financials, largely because of a successful takeover bid for holding Wing Hang Bank by Overseas-Chinese Banking Corporation, which meant Wing Hang hit Mr Nicholls’ valuation target and so he divested the holding completely.

The manager has used the proceeds to add to consumer discretionary plays as well as internet-related stocks, such as Tencent.

He said he had also increased his exposure to industrials and also used his entire 15 per cent A-share quota. Chinese A-shares are those listed in mainland China as opposed to H-shares listed in Hong Kong.

Elsewhere, Mr Nicholls said he had “ramped up” the use of third-party resources to improve corporate governance checks.

“We are using third party resources more,” he said.

“We have people doing background checks and in many cases asking around and looking for red flags in terms of reputation. We have tried to learn from things which have been issues in the past.”

Mr Nicholls’ predecessor Anthony Bolton was hit in 2011 by fraud claims surrounding Chinese timber firm Sino Forest and energy firm China Integrated Energy. The Toronto-listed Sino Forest lost 75 per cent of its share price following the allegations.

The manager admitted he had underestimated the corporate governance challenge but added that he had taken steps to improve his research methods for smaller companies.

At the time, Mr Bolton said: “I knew corporate governance was going to be a challenge but I didn’t realise it was that bad. We now do a lot more cross-checking and due diligence to make sure what the company says is reality.”