CHINA ¿Less growth, more opportunity?

Andrew Swan, gestor del BGF Asían Dragon Fund, - Lunes, 23 de Marzo

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Los comentarios del presidente Li Keqiang a principios de este mes sobre una nueva normalización económica en China han reavivado el debate sobre el alcance exacto de los avances registrados por las reformas de su politburó. No obstante, a pesar del escepticismo actual, creemos que las reformas han avanzado en varios frentes y han reducido las primas de riesgo de las que depende China. El mercado chino de las llamadas acciones A repuntó (desde niveles muy bajos) antes de ese primer recorte de tipos y ese dinamismo se ha mantenido entrado el Año Nuevo. No obstante, no se ha tratado de otra «subida de azúcar» impulsada por las políticas monetarias; desde nuestro punto de vista, algo más importante está en juego: el reconocimiento de las mejoras estructurales registradas durante el último año. Basta con observar los gobiernos locales: representan casi el 90% del gasto público total, mientras que sólo contribuyen en alrededor del 50% de los ingresos fiscales (con frecuencia, mucho menos). Como consecuencia del frenesí de su inversión en infraestructura y construcción, la deuda de los gobiernos locales chinos pendiente de pago asciende a los 2,9 billones de dólares, lo que equivale a aproximadamente un tercio de su PIB.

Supone una carga para el país y una preocupación a nivel internacional. Las autoridades bursátiles chinas también han adoptado normativas destinadas a frenar la expansión del sector bancario «sumergido». Como resultado de ello, los riesgos contingentes de los bancos son menores y los inversores se han abalanzado hacia productos de seguros que, en términos relativos, ahora parecen más competitivos. Priorizamos algunas empresas estatales que, hasta finales de 2014 no constituyeron una preferencia. La reforma de las empresas estatales brindará oportunidades para lograr rentabilidades nunca vistas, puesto que fomentan una mayor eficiencia operativa, una mejor alineación de los incentivos a los altos cargos y transfieren las decisiones sobre asignación de capital al sector privado

Andrew Swan, Portfolio Manager BGF Asia Dragon Fund

 

Less growth, more opportunity?

 

Premier Li Keqiang’s comments earlier this month on a new economic ‘normal’ in China have revived debate on exactly how far his politburo’s reforms have progressed. But despite ongoing scepticism, we believe reform has advanced on a number of fronts and has reduced the risk premium overhanging China.    

The PBOC has cut interest rates twice in four months, demonstrating that policymakers are willing to take steps to achieve the kind of stable growth that will allow the government to work on ensuring employment and social stability. Without it, it would be difficult to advance necessary reforms and focus on the larger structural concerns.

China A-shares highlight concerns

Around 80% of the MSCI China Index is made up of state-owned enterprises; 40% of the Index is financial companies. Prices in these sectors had been depressed for some time. Prior to the first rate cut in November last year, companies with dual Shanghai and Hong Kong listings saw their A-shares trading at a deep discount to their H-share counterparts. This was largely because of domestic investors’ concerns over issues including leverage, credit growth, local government debt, shadow banking and possible liquidity events. Many of the reform proposals first put forward in late 2013 specifically targeted these areas.

China’s A share market rallied (off a very low base) ahead of that first rate cut, and that momentum has carried on into the New Year. But it hasn’t been yet another policy-fuelled sugar rush, in our view something more fundamental is at play – a recognition of the structural improvements which have taken place over the last year.

The discount on A-shares has now reverted to a premium, so short-term at least there is likely to be more opportunity in dual-listed H-shares.  Longer-term, the benefits of effective reforms are palpable for both.

Local governments held to account  

Take local governments; they account for almost 90% of total government expenditure, but only bring in around 50% of government tax receipts (often much less). As a result of their frenzied spending on infrastructure and construction, China now has around $2.9 trillion of local government debt outstanding, equivalent to about a third of its GDP. It’s a national burden and an international concern.

One of the Ministry of Finance’s wide-ranging set of fiscal and monetary reforms is to find ways for local governments to raise their own financing – which should ultimately give them more visibility on cash flows and improve their debt servicing capability.

From 2016 onwards, local governments will be able to issue their own corporate and municipal bonds. They will also be able to levy new taxes. This should help curb their reliance on land sales for revenue and on inflated property prices at a time when they are cooling noticeably. Ultimately, all of this should reduce the systemic risk of the country’s banks having to absorb huge bad debts.

 

Bringing shadow banking into the light

 

The China Banking Regulatory Commission has also passed new regulations aimed at reining in the expansion of the shadow banking sector. As a result, banks’ contingent risks are lower and investors have flooded towards insurance products which, relatively speaking, now look more competitive.

These are the first, tentative steps on what we expect to be a long road to effective reform, but they have already helped ease investors’ anxiety about the banks and revived their interest in the insurance sector.

But the majority of Chinese household wealth is still held in property, with very little in stocks. Even now, A-shares are inexpensive and a powerful rebound in sentiment could provide numerous opportunities for the market to rise further. That being said, it won’t be a solid line upwards and we will see some volatility along the way.

Less reliance on the state

We favour some of the state-owned enterprises (SOEs) which, until the latter part of 2014, were out of favour. SOE reform will provide opportunities for returns we haven’t seen before as they deliver operational efficiencies, better align management incentives and transfer capital allocation decisions to the private sector.

Elsewhere, the opening up of new sectors to private players will provide fertile ground for many “new economy” internet companies to expand into. We’re also interested in companies which will benefit from the government’s push to reorient exports from low-end manufacturing, such as textiles and toys, towards products which are higher up the value chain and come with some level of intellectual property.

We are however avoiding consumer staples stocks. They’ve been a consensus trade for some time, and valuations are still high. As overall economic growth slows down, capacity continues to be added and competition heats up, we believe it will become increasingly challenging for these companies to meet what are high earnings expectations. Reforms, particularly those that target corruption, are having a negative effect, so it’s more of a wait and see situation.

Reform should drive more sustainable gains

China’s economy is definitely slowing, but it’s slowing on purpose. Premier Li has set the 2015 GDP target at around 7%, below the 7.5% goal that the economy narrowly missed last year. This is no hard landing.

What we are looking at is the ability of the government to tackle concerns like bad debts, corruption and pollution after three decades of breakneck growth. They can’t do it all in the short term, but we are keen to see things keep moving in the right direction, even if just at the margin. As long as the leadership team remains firmly committed to reform and continues to build a consistent track record of implementation, we should see a more sustainable bull market.

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