The country has been at the centre of fears of a ‘hard landing’, a bursting property bubble, or the threat of shadow banking to the rest of the economy for a number of years now. Concerns over the future of the largest emerging market are neither new, or potentially unfounded.
But there are positive signs that China won’t fail in the epic fashion some might suggest.
Earlier this month, the first corporate bond default in China, in the form of Chaori Solar Energy, signalled a changing policy from the government and an allowance of the market to take more control. In a press conference following the closure of the 12th National People’s Congress (NPC), China’s premier Li Keqiang noted that “defaults may not be avoidable in some cases, but the government will work to reduce systemic risks”.
He acknowledged concerns about downward pressure on the Chinese economy, but pointed out it had met its GDP growth target in 2013 and an audit had revealed “the government debt is controllable and below the internationally recognised warning line. The government has tightened regulation and implemented Basel III”.
These are all positive signs in an economy that has previously been less open about its workings. The current government is also focusing on reform, particularly financial and fiscal changes including tax reduction measures on small and micro enterprises.
Mr Keqiang added: “The Chinese economy has great potential and we have the ability to maintain full control this year. Last year we met our growth targets without stimulating the economy, so why can’t we do it again this year?”
These transitions are not likely to happen overnight, or without some kind of volatility in markets, but the latest OECD forecasts put China well ahead of the rest of the Bric countries – Brazil, Russia and India.
Stephen Cohen, chief investment strategist for iShares EMEA, notes: “As the Chinese authorities attempt to clamp down on the build-up in debt to move from an investment-led to a consumption-led economy, we expect to see increasing levels of volatility. The current growth weakness could lead to the government re-prioritising growth in the short-term to limit the speed of the slowdown. They could act as they did last June after a very similar slowdown, through easing monetary conditions and boosting investment. As such, there could soon be an opportunity for Chinese equities to perform in the near-term on the prospect of possible policy action.”
China remains at the core of emerging markets and the global economy, so if you can stomach the volatility it is not a place to rule out completely.
PICKS
Fidelity China Special Situations
Currently managed by veteran Anthony Bolton, it will switch management from April 1 when Dale Nicholls takes the reins. Launched in 2010, the investment trust has struggled at times with a three-year loss of 2.68 per cent for the three years to March 19, according to FE Analytics. But with a focus on mainly small-cap companies, Chinese reforms to reduce tax on these companies could see a boost that could push this fund higher.
Matthews Asia China Small Companies
One of the newer entrants to the market, this fund managed by Richard Gao has made its mark in the IMA China/Greater China sector for the 12 months to March 19, sitting in second place with a return of 16.62 per cent. Launched in February 2012, it remains quite a small offering at just $2.3m and aims to invest – directly or indirectly – at least 80 per cent of its total net assets in small companies located in China. This could be one to watch if performance continues to remain strong.
EDITOR’S PICK
Gam Star China Equity
This $2.4bn (£1.45bn) fund is managed by Michael Lai and is ranked first in the IMA China/Greater China sector in a five-year period to March 19 with a return of 143.73 per cent, putting it in the top three of the sector in one and three year periods. However, the strong performance has come with a price as the company announced earlier this month that once the fund reaches $2.6bn assets under management, only existing investors and new clients in the final stages of the due diligence process “may make further contributions to the fund”.
