Canadian Investment Review

Don’t Fear China’s Debt

Written by Jennifer Hughey on Thursday, March 1st, 2018 at 8:00 am

story_images_new-growthPlan sponsors should be optimistic about the global economy despite negative headlines, says Olga Bitel, an economist with William Blair, who remains upbeat about the future. And while much focus has been on China’s risks, there are ample opportunities for investors – and a risk of not participating in the growth.

As Bitel explains, worldwide industrial production growth is positive across the board – in developed markets, it’s actually ticking up for the first time in eight years, moving up about 2% a year.

It’s positive for emerging markets, which are poised for continued growth after years of hard work. “Most of them cleaned their macro houses long ago,” she explains, adding that they are now driving their own domestic and macro- economic policies. That has had a positive effect on growth, she says: “The current account to GDP ratio for most of these countries is hovering around zero,” which means these economies are generating enough hard currency income to sustain their spending habits.

Some emerging economies are also running trade surpluses, which is good news.

China’s Challenge

China still looms large, however, and Bitel explains that the slowdown in that country has presented challenges for other emerging markets growth. “That massive deceleration we saw from 15% growth to sub 6% ended in 2015,” she explains; however, investors are still concerned about the extent to which debt has built up in China and continues to balloon.

While China’s debt is large – well over 200% of GDP, she adds – China has a couple of aces up its sleeve. The first being that its debt is held domestically – and it’s concentrated in state-owned enterprises, with the Chinese government as the creditor.

“Would you ever default on yourself?” she asks. “No.”

Against that backdrop, nascent Chinese financial markets are moving past the embryonic stage and, while they’re still far from maturity, companies on the Shenzhen Stock Exchange now represent those firms that are driving China’s growth – IT, entertainment, leisure, all sectors aimed at a growing middle class. Foreign investors can now invest in these companies and tap these opportunities.

Bitel says the opportunity for investors right now lies in the lack of coverage.

“Most of these companies are covered by one broker and, if any of you have ever worked with Chinese brokers, you know the financial system there is relatively nascent.”

That creates an exciting opportunity for investors to bring their own experience and due diligence to help identify top performers. And now that China has been formally included in the MSCI Index, the need to look seriously at its companies is growing.

Is it risky for investors? Depends on how you view the risks, says Bitel. “The risk from our perspective is not participating in the opportunity.”

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