Expect China to do well, yuan to appreciate

Expect China to do well, yuan to appreciate

In our monthly series featuring fund managers and leading market experts, senior portfolio manager Helen Lam, of Allianz Global Investors in Hong Kong, is bullish on China despite worries over growth concerns.

Concerns over slowing growth in China have spooked investors but Allianz Global Investors fund manager Helen Lam remains bullish on the country.

The senior portfolio manager at Allianz Global Investors expects China to do well, with the yuan set to appreciate.

She says: "We continue to believe that China should be able to meet the growth market, especially with the improving of global macroeconomic conditions."

Ms Lam has been in the industry for 18 years, and spent 14 years with Allianz Global Investors.

In the Hong Kong office, she is responsible for managing more than US$2 billion (S$2.5 billion) in fixed income assets, including the Allianz Renminbi Currency Fund and the Allianz Renminbi Bond Fund.

Q: What do you think about the shadow banking problem in China, where 97 per cent of 42 million small business cannot get bank loans?

There are a few concerns in the market. First, it is about the size of the shadow banking.

The markets range from 15 trillion yuan (S$3 trillion) to around 30 trillion yuan on the high end.

Our banking analysts estimate that it is somewhere around the middle, which works out to around 44 per cent of last year's gross domestic product growth. It's quite manageable.

If you look at the size, it is not really that substantial, especially compared to developed markets like the US and Europe, which are over 100 per cent if you're talking about shadow banking activities.

Q: Will shadow banking evolve to become a crisis?

To the market, there is more of a concern about the rapid pace of the growth of shadow banking activities, especially with a lot of people looking at the growth rate of total social financing (TSF).

TSF is a broad measure of liquidity or credit that includes corporate bonds and trust loans, an indicator designed to measure overall liquidity in China's real economy.

This translates into very rapid credit expansion in China. Going back to shadow banking, a lot of people are assuming that the underlying credits are all equally risky. But the underlying credit may not be as risky as expected.

It is worthwhile to be cautious about the pace of its growth but we do not think it is out of control.

Q: Where do the risks in shadow banking lie?

There are different risk characteristics of shadow banking. Some are more risky, such as trust loans - credit to property developers and financing companies, of the local government.

Overall, not all shadow banking activities have that risky characteristic. Most of them are plain vanilla structures at the back, so there's no actual derivative structure, unlike what actually caused the problem in the United States that led to the Lehman crisis in 2008.

We don't think that will be happening in China, given that these kinds of financing activities at the back do not involve a lot of complicated structure.

Q: Looking at the slowing down of China's GDP, especially after the rally of the economy at the end of 2010, are you still expecting good GDP growth?

A lot of people have concerns about the first quarter of China's GDP growth, which came in at 7.7 per cent versus the market expectation of 8 per cent.

All along, we have believed that the 9 to 10 per cent kind of GDP growth in China is behind us. China is entering a different stage of economy. Growth between 7 and 8 per cent is very reasonable and hasn't caught us by surprise.

Q: Why is it hardly surprising?

People are disappointed about China's GDP growth because they are a little too optimistic about China's reforms, that they would lead to strong growth in the very near term.

But structural reforms are going to take time to happen.

They have been talking about trying to rebalance the economy from export and investment, to one that is more consumption- and domestic-driven.

This is not going to happen overnight, so this year or in the near term, infrastructure investment will continue to be the major driver for growth in order to support the 7.5 per cent growth for the year.

Q: Should a person put his money into the yuan?

Yes, a steady appreciation of the yuan should be a more favourable scenario for China as it redirects its economy from export-led and investment-led to a more consumption-led economy.

It should be able to help increase purchasing power, helping to rebalance its economy.

If you look at the fixing of the yuan, China has allowed its yuan fixing to strengthen against the US dollar in the past six months.

However, the market has not confirmed what will happen to the yuan, given that the yuan has depreciated over 20 per cent over the past six months.

Q: What's your outlook for China?

On the currency side, we are positive on the long-term basis. We expect the yuan internationalisation process to be positive, and are positive on China trying to rebalance its economy, and on the yuan to appreciate over a long-term horizon.

My major focus is on the offshore yuan bonds market, and we think that in the near term, the technicals should be very favourable for the offshore yuan bonds market, given that the interest rates in the global developed markets are so low.

Regarding currency, it also offers some potential. That is why we are positive on the dim sum bonds market (offshore yuan bond market).

Q: Is China still a good market to invest in or is it overhyped?

Definitely, it will continue to grow. China is well aware of the shadow banking problem so that is not going to be any major concern to the economy or the financial system.

With the OMT (outright monetary transactions) announcement, the liquidity situation for Europe has much improved. It is well-reflected in the Italian government bond yield which has come down from over 6 per cent to less than 4 per cent as of now. The overall macro situation has improved and this is positive for China's economy.

Q: With this in mind, what are your projections for the yuan appreciation?

The pace will be slower compared to before but we do expect a 2 to 3 per cent appreciation this year, which should be a reasonable assumption.


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