Mark Tinker, head of Axa Framlington Asia, gave delegates many persuasive reasons why they should not get caught up in the widespread fears of a Chinese meltdown and the impact of that on the global economy. Here is a summary of a paper he provided to delegates, in which he referred to the doubters as ‘panda bears’ and even ‘sinophobes’, plus feedback from a fellow believer in the Chinese economy – Sam Sicilia, chief investment officer of HOSTPLUS, who was on the session with Tinker.
One of the key starting points for Tinker’s faith in China is the parallel with the US economy in the early 2000s.
“Almost all the negatives being thrown at China were also thrown (mainly by the same people) at the US as it climbed a multi-year “wall of worry” during the post dot com era, as well as post the GFC,” he says.
“The list is similar, too much debt, lack of credibility in monetary policy, panics about inflation, followed by deflation, a belief that corporate earnings are all fake.
“Throw in a property bubble, in fact throw in constant talk of bubbles, a broad contempt for the ability of ‘naive’ equity investors and periodic panics about a weak currency and you have a pretty transferable template.”
Central to Tinker’s thesis is that volatility in China’s equity markets does not necessarily reflect problems with the underlying Chinese economy. A point also echoed by Sicilia.
“Recent market moves have emphasised the fragility of markets now liquidity has been driven out by regulation. Market mechanics are amplifying rather than dampening momentum,” Sicilia says.
“Capitulation in China related trades including currencies commodities and emerging markets is being justified on the basis that Chinese fundamentals have changed. They haven’t.”
One of Tinker’s most interesting pieces of analysis is on the property market, which he believes investors have over simplified in their fears. He points out that tier 1 and tier 2 cities do not have excess supply and are effectively a sellers’ market. Tier 3 cities do have excess supply, he says, but losses in these cities are unlikely to spread contagion or impact the growing popularity of quality property in the major cities.
On the related issue of high levels of debt, he believes again that the analysis is misplaced.
“Debt to GDP matters far more if it is foreign currency, this isn’t,” he says. “Moreover much local government debt is backed with high quality assets and can (and I believe will be) restructured to turn the debts into long term investable assets.”
Tinker is a believer in the Chinese government’s five year plan and not least the enormity of the level of economic activity required to achieve this. One measure he finds particularly compelling is that retail sales are growing at 10 per cent per annum.
He says: “The economy is so big that even 4 per cent growth would make it a significant contributor to overall world growth (currently it provides around a quarter of all growth).”
Tinker believes the heart of poor analysis of China lies in location.
“The further people are from China the more certain they appear to be, and they are mostly negative,” he says. “Sitting here in Hong Kong, I have to say that I am neither as certain, nor as bearish as the Western consensus appears to be.”
