First State’s Angus Tulloch has sounded the alarm on China, warning that the government is going to be forced to bail out its stricken banking sector leading to giant losses.
The manager of the £6.7bn Asia Pacific Leaders fund said write-offs on the value of risky Chinese loans will eventually lead to bank rights issues, in a significant hardening of his public stance on China.
To make matters worse, the manager said many of the more apparently stable ‘consumer staples’ stocks on the Chinese market may also be set for a slump as their high valuations look increasingly unfounded.
“There are some major problems looming in China as a result of the shadow banking system and misdirected lending,” he said in a client update.
“We expect the government to step in and bail out any ailing banks by obliging other government controlled institutions to intervene. This would lead to sizeable write-offs in the banking sector, resulting in substantial rights issues.”
Mr Tulloch has long adopted a cool tone towards China and runs only a low exposure to Chinese mainland shares, preferring to invest through the Hong Kong share market.
But the financials sector is the Asia Pacific Leaders fund’s biggest sector exposure according to its July 31 factsheet, with a holding in Singapore-based Oversea-Chinese Banking Corporation its top position.
Mr Tulloch’s heightened concern comes after in early July Investment Adviser reported multi-asset investors were hoarding money in cash as fears over the nation’s credit crunch mounted.
Panic was first sparked when Chinese policymakers in June warned that they would not step in to provide liquidity to the banks in the event of a crunch, sending short-term borrowing costs spiralling.
China is also cracking down on its unwieldy ‘shadow banking system’ of unregulated credit providers, amid concern that too many risky bets have taken place.
Following a sharp market reaction to the liquidity statement – the Shanghai Composite index shed 5.3 per cent in a day – Chinese authorities then took a more conciliatory line, but this has failed to stem losses.
From its recent peak on February 6 to last Thursday (August 8) the market had shed roughly 16 per cent, and it remained 41 per cent lower than its July 2009 highs as investors eyed a series of economic growth downgrades –down to 7.5 per cent in the second quarter.
Two major Purchasing Managers’ Indices last week hinted at signs of life in the Chinese services sector, but the tone of investors remained downbeat.
Mr Tulloch said the other threat was a “sudden switch” into more cyclical Chinese stocks, which his funds have tended to underown.
This would be “caused by the realisation that a lot of steady-growth consumer staples companies are fully priced”.