by Alexandra Capik
Increasing negative investor sentiment toward China is overshadowing a number of stronger positives and long-term investment prospects, according to Investec Wealth & Investment (IW&I). The negative response is mainly due in part to reports centring around China’s unprecedented growth, huge debt, corruption, unreliable statistics, growth slowdown, and massive size, which could be a problem for the global economy if something were to go wrong.
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The slowdown in China is considered to be self-engineered by the new leadership. Efforts by the new leadership to rein in lending and tackle corruption have proved to be burdensome on growth, estimated to be over 3% of GDP according to IW&I. Bankruptcies and insolvencies will be part of regular news-flow from China. This will, in fact, be a sign that markets are being allowed to work rather than a sign of disaster.
According to head of research John Haynes, China’s public and private sector debt has risen from around 150% to over 200% of GDP since 2008. Despite contrary belief, the country does hold a lot of assets despite the $3.8 million of foreign exchange reserves which make up about one-third of GDP.
Haynes said: "Only a small fraction of investment over the past five years has been in ghost cities or corrupt projects; a good deal has been in productivity enchasing infrastructure, including housing and transportation. To the extent that it has been in ‘bad’ assets, these have largely been sponsored by regional/provincial governments whose credit will ultimately be supported by the remarkably solvent central government."
The ‘shadow’ banking system in China has generated concerns because their products have been sold to consumers. Despite ‘shadow’ banking’s high profile, the sector is only a small part of China’s debt burden. The rise in China’s debt over the past five years is largely due in part to the corporate sector.
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By GlobalDataThe fear that China could potentially face a catastrophic crisis is not all that likely, believes Haynes. A country’s politics or financial system must be unstable for a crisis to develop. Neither is the case in China.
The Eurozone crisis has taught economies what to look out for (i.e. bankruptcies or the possibility of key banks). Haynes believes there will be no crisis in China because the key institutions are state-owned in addition to being well funded.
Haynes added: "Many China watchers appear to be confusing the signals generated by a necessary tightening of control in the financial sector with an imminent crisis. We think this will prove to be overly pessimistic. We are not factoring-in a China ‘surge’ in our positive investment outlook for the year but simply a stabilisation. Since we think China is in control of its own destiny, to us this seems like a modest expectation."
