China’s non-financial sector debt stood at 235 per cent of GDP in 2016, and the IMF expects this to rise to 290 per cent by the end of 2022.
Releasing its latest growth and debt forecasts, the IMF described China’s current debt trajectory as “dangerous” and suggested the credit had been used “relatively inefficiently”.
The IMF added: “Failure to continue the recent focus on addressing financial sector risks and curb excessive credit growth [mainly through tighter macroprudential policy settings] could result in an abrupt growth slowdown, with adverse spillovers to other countries through trade, commodity price and confidence channels.”
The action taken by other organisations has put further pressure on the Chinese government. Rating agencies Standard and Poor’s and Moody’s have downgraded China’s credit rating from AA- to A+ and AA3 to A1, respectively.
Mortgage-driven household borrowing could be another sticking point, according to China’s central bank governor, Zhou Xiaochuan.
However, the governor did concede that the current levels of 40 per cent of GDP are healthier than the international average.
On a positive note, although the Chinese property market has soared in recent years, it appears policymaker measures to ease fears of overheating are having the desired effect.
Data from Reuters, analysing the percentage year-on-year growth rate in 70 major cities, shows that the average cost of new housing has fallen for 10 consecutive months since peaking at 12.6 per cent in November 2016.
Year-on-year growth had halved to a more controlled 6.3 per cent as of September 2017.
Performance
Those selecting retail funds appear in two minds about China’s prospects. According to data from the Investment Association (IA), the IA China/Greater China sector witnessed nine months of consecutive net outflows from August 2016 to April 2017, total redemptions standing at £201m.
The situation has since begun to reverse, with net inflows in three of the five months between May and September, but total flows of just £2m during this period suggest investors are still cautious about the long-term outlook.
Against this rather mixed backdrop, how has the sector fared against others?
Results over the past 12 months have been positive. Data from FE shows that the sector has outperformed all others over the six months to 1 November, and is only bettered by IA UK Smaller Companies in the past year.
Individual fund performance is shown in Table 1, which lists the top 20 performers over the past five years. Other sectors have certainly proved to be more fruitful over this period, but five-year results have been strong on the whole.
The average fund has mustered nearly 15 per cent growth per annum, with top performer Fidelity China Special Situations averaging more than 26 per cent each year.
The Fidelity offering also ranks as the greatest success over three years, level with Neuberger Berman China Equity, in what was a particularly fertile period for Chinese stocks. As index performance would suggest, the majority of this growth has been since 2015.
