As concern about an impending crunch in China's credit markets grows, Rebecca Jones asks commentators if they are selling the region or holding steady.
Ian Brady, CIO, Oaktree Wealth Management
I started selling-out of China in late January, following a visit to Hong Kong where I met several local fund managers who were worried about bubbles appearing in some Asian markets. They were especially concerned about property markets in Hong Kong and Singapore, where house prices are currently 13x the average salary. Since then, we have gone to zero exposure in China.
Incremental dollar/renminbi credit in China has had a much lower impact on GDP growth. At the margin, where the majority of credit has collapsed, I think every renminbi in credit currently adds $0.17 to GDP, whereas in 2007 it added $0.83 to the economy.
If you are piling more and more debt into an economy and it is not growing, ultimately, that is the tipping point at which the economy falls under the weight of credit. The Chinese authorities are now onto that and would rather have significantly slower growth if the quid pro quo is to slow down credit.
Is the nation heading for a credit crunch?
Emerging markets are getting interesting on a valuations basis but, at the moment, we would not go back into China. The chances of a credit crunch have become binary and making a binary investment is just as good as gambling.
Going back into China is not a question of time; it’s a question of whether we can see the end-game for credit markets. China’s new leadership has been very bold and, generally, it has done the right thing, even if it brings about some short-term pain. I would hope we will back in China by the end of the year.
Lars Christensen, head of emerging market research, Danske Bank
There is no doubt the People’s Bank of China (PBOC) feels that the easing it did back in 2008-2009 was excessive and it started to turn that around in 2010. However, in the past six to nine months, monetary policy has become too tight in China.
I don’t want to say that a crash would be on the same scale as that seen in the US, but the PBOC is very backward looking in the same way the Fed was in 2008. The whole shadow banking system was allowed to grow too big and now we have a significant monetary contraction as it cracks down on it.
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