China’s slowdown not so smooth

Investors are not getting well rewarded for the risks of a slow-down in China while the debt fuelled growth is expected to slow and the transition may not be smooth, according to Spectrum Asset Management.

According to the firm, investors were being lulled into comfort because of China’s ability to “steady the ship each time the economy wobbled over the past quarter of century”.

Spectrum’s principal, Damien Wood, stressed that China’s credit funded growth could not continue in the manner of the past without posing excessive risks to its economy and controlling financial risk would be the country’s top priority this year.

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He also said that China would soon face huge demographic headwinds.

“Its working age population is set to shrink rapidly as a percentage of the population,” he said.

“It concerns us at Spectrum that the combination of China’s demographics and its high corporate debt levels bears striking similarities to Japan in the late 1980s.”

At the same time, the Chinese government was trying to tame the credit growth dependency of the economy.

Spectrum’s view is that infrastructure projects may have the potential to soften the impact of “an orchestrated slow-down in private sector credit growth”.

“In our opinion, these factors mitigate but do not eliminate the risk of a large fallout resulting from bringing China’s corporate debt growth back to growth levels that look more sustainable,” Wood said.

“We plan to keep the portfolio in low risk mode until the returns for perceived risks improve.”

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