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Magazine Issues » July-August 2022

China Roundtable: Has China become uninvestable?


Real estate ‘crisis’
The China property bubble continues to demand the attention of asset managers as they try to determine how the government manages bank liquidity and the unwinding of bad debt.

Chen says the real estate sector is “60 trillion” in size – the largest real estate market in the world.

“I don’t think China intends to create more volatility in that market, rather it wants it to be affordable. Many pundits were really hoping that the property market downturn in China would turn into a crisis. Then, it wasn’t. It was one company experiencing difficulties. So, the default was the highest in history, and in my opinion, there’s going to be a period of digestion in real estate.”

In Chen’s view, the real estate sector isn’t “out of the woods yet” but isn’t collapsing either. “There is going to be quite a sizeable, long period of consolidation. The sales volume is low, prices are correcting. Remember that it’s still probably about 60% of financial assets of a Chinese household. This might represent a beginning for households to start diversifying their financial assets away from tangible assets like real estate to more equities and other financial assets.”

According to Tea, the Chinese government is “trying to gain comfort” with releasing slightly more liquidity, but in a measured way. “The idea once again is not to go back to the past and face leverage issues. In China, the deleveraging process has never actually stopped – despite geopolitical risk, US/China trade tensions, and then the Covid situation.”

Tea added that the debt level in China has remained “relatively stable”. Peer-to-peer lending platforms and similar wealth management products – “which have been one of the major sources for shadow banking in China” – have sharply been reduced.

“I think the goal is to now focus on stabilising growth because that has become the overriding priority, especially after all those risk factors that have impacted the economy. But they still want to do it in a moderate way to avoid any return to the leveraging process.”

Duhra pointed out that he does not have any exposure to the large Hong Kong family-owned conglomerates, partly due to their exposure to Chinese property.

Historically, these conglomerates in Hong Kong were seen as a way to gain exposure to China. Today, specialised mainland companies offer larger, more liquid and better-managed alternatives.

Duhra said: “Traditionally, Hong Kong has been a great source of dividend yields and these conglomerates have been a bit more stable. Then they’ve gone to China for growth opportunities and a bit more volatility, or in some cases a lot more volatility.”

At the moment, there are better dividends to be had in Australia, Singapore and Taiwan, Duhra said. The companies are more stable and with strong balance sheets.

“I still think that there is a place for some of these Hong Kong conglomerates in terms of yield because they all trade at big discounts to NAV, and when that comes out to something like 50% to 60% discount to NAV, then there may be opportunities.”

Hong Kong companies today have a lot more China investments than they used to, said Duhra, but also a lot of property. “If you really go down into the detail, a lot of them have property. But they’ve been adding a lot to Chinese property over the years, and it’s been with mixed results. We’ve seen that elsewhere as well, such as in Singapore. I think that if I’m looking for growth in China, then I’ll just go directly to China and invest in a company that’s 100% domestically focused, which I believe is an opportunity.”

He highlighted companies that produce goods for domestic consumption as an opportunity.

At the moment, asset managers must consider the relative attractiveness of Asia ex-Japan compared to China, he said; look at capital flows between markets and valuation models. But, he added: “China has been relatively well prepared compared to their Asia neighbours in terms of technology innovation. Don’t forget, China has 800 million urbanised people – several hundred million out of that is middle class. You don’t have that anywhere else in any country in the world, only China.” These people provide the demand base.

Chen pointed to reports that China is investing in infrastructure again, but said: “I’m against that view; it’s not all infrastructure. It is green projects, climate change initiatives and carbon reduction.” China is the largest electrovoltaic market in the world, she added, “so with all those elements in place, if I look for a country that can offer interesting stories, picks and potential alpha opportunities in Asia among emerging markets, China is better positioned in offering managers or investors active themes or passive allocations and more opportunities over neighbours”.

Tea said: “We think that China clearly is too big to ignore and continues to offer – despite the recent volatility – tremendous growth stories. The megatrends that I have highlighted are here to stay, regardless of internal or external factors: tech and innovation, consumption upgrading, industry consolidation.”

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