A stronger than expected economic recovery has led to much optimism among China-watchers, with HSBC’s Qu Hongbin, for example, raising his 2009 GDP growth forecast to 8.5% from 8.1% on the strength of robust investment growth and steady consumer spending. Foreign and domestic investors seem to share that optimism. The authorities are allowing more firms to invest in financial markets: fund management consultancy Z-Ben Advisors reports that $1.5 billion-worth of quota for qualified domestic institutional investors (QDII) has been allocated after a 17-month moratorium, with the backlog of 20 quota applicants to be cleared by the end of 2010.
Yet there are experienced China commentators who remain deeply worried about a looming disaster (see “China’s looming NPL crisis“, Euromoney, April 2009) that they see as inevitable given the market environment and policy decisions of the authorities. Tomo Kinoshita, an analyst at Nomura, argues that a dangerous asset bubble is developing, referring to the similarities between conditions in China now and in Japan in the 1980s. The likely deregulation of the bond market and interest rates in China, coupled with aggressive lending by banks, mean a probable inflation of asset prices and – somewhere down the line – the rapid increase in NPLs that is the inevitable result of excess liquidity. Kinoshita identifies six characteristics of Japan in the 1980s: aggressive lending by banks, abundant liquidity, stable prices, excessive investment growth, widespread optimism, and leveraged asset purchases by households and companies. Of these, he says, all but the last are now observable in China.
Some Rmb9.3 trillion ($1.4 trillion) in new loans was extended by banks in the first three quarters of 2009, already more, as Kinoshita notes, than the mere Rmb5 billion projected for the whole year. That aggressive lending, coupled with the economic liberalization that must accompany China’s push to internationalize the renminbi and develop the corporate bond market, creates an environment in which asset price growth could accelerate rapidly before bursting to leave behind the sort of mess Japan spent a decade clearing up. The glimmer of light in the economic data that some analysts see as proof of recovery is seen by others as the headlights of an oncoming train.
The danger when everyone is looking for a positive story is that they all pick the same one and overvalue it. A Hong Kong-based hedge fund manager who often visits the mainland tells Euromoney that he doesn’t know what to make of what is going on in China. However, although he believes the country’s thirst for commodities still holds promise for investors, a long-only strategy on China would be dangerously speculative given the bubble-like conditions described above. Although the macro-economic data seem to be telling a positive story, those on the ground see an economy still riddled with dangers.
