Investors on ‘knife-edge’ when it comes to China: AB

Global fund manager AllianceBernstein (AB) has issued a further cautionary note about investment in China.

The global fund manager AB, said policy risk in China has spiked over the last months, despite there already being risks, as the country is moving from an investment-driven model to a consumption market.

AB said it is still optimistic about China's long-term prospects, but in the policy area and property market, risks have intensified and "now turn on a knife-edge".

AB's director of Asia Pacific fixed income, Hayden Briscoe, said there are increasing concerns as result of the Budget announced at last month's National People's Congress which had created "the potential for a vicious and ultimately self-defeating cycle".

It will require "more stimulation for housing and infrastructure", which will lead to a "compensatory response in the form of more aggressive implementation of the supply side reform", Briscoe said.

AB said the budget showed that nearly half of the planned fiscal shortfall included tax cuts, reductions in business imposts (to boost competitiveness) and allowances for redundancy payments from cutting staff in heavy industries.

"A high proportion of the budget was dedicated to pushing through the governments supply-side economic reforms, with the balance aimed at stimulating local investment demand, mainly through support to the infrastructure and housing sectors, Briscoe said.

AB said supply side reform is particularly risky in the current environment as global economic growth is slow and China's own growth continues to face downside risks.

"China's exports are deteriorating sharply in the absence of a recovery in external demand", and when it comes to consumption, that "may begin to fade as export income falls further and supply-side reform causes redundancies and uncertainty about job security", Briscoe said.

Compounding on top of cyclical risks are housing market risks, as residential house prices have increased by "exuberant" levels "even by Chinese standards" according to Briscoe.

He said the average purchase price has jumped on the back of excessive liquidly in the market, rather than fundamental demand.

This year, "sale prices for residential properties in Beijing, Shanghai and Shenzhen have risen by 31, 26 and 74 per cent respectively," Briscoe said.

He said the increased liquidity stems from an increase in, down-payment loans from real-estate agents (which have now been suspended by the Government), peer-to-peer lending and wealth management products and developers.