China cannot progress economically unless it tackles its growing debt levels, according to the Citywire AAA-rated Andrew Swan.
In an investor update, BlackRock's head of fundamental Asian equities said debt levels required to create a unit of GDP are currently too high.
Debt productivity is falling and inefficient state firms are taking up an increasing share of lending over the more efficient private sector, he said.
‘Rising debt levels should be juxtaposed with the need to rebalance the economy. Rebalancing cannot happen without stability – but this can only happen by boosting the industries of old, something that will actually set back the rebalancing process,’ Swan said.
‘This is something of a catch-22 situation, where the fine line between hitting growth targets, reducing debt, skewing the economy to the private sector and cutting surplus capacity in inefficient heavy industry is a hard one to tread.’
Swan added that these problems could be resolved through cultural change from businesses and government officials in China’s provinces. While progress would not be instantaneous, he said China could reduce debt while maintaining growth.
‘China has a lot of internal resilience and, at the end of last year, many investors overlooked this, leading to the market becoming extremely undervalued. Discounting it purely on the back of its debt issues would be short sighted,’ he said.
Spotlight on services
‘Last year the percentage of GDP stemming from services nudged beyond 50% for the first time; the Chinese government’s statistics bureau announced this in January 2016 saying that, for the first time, services accounted for more than half of the economy, climbing to 50.5% from 48.1% the year before,’ Swan said.
‘It also said that manufacturing’s share of the GDP had fallen more than two percentage points, falling to 40.5%. Moving towards a service-led economy will give the Chinese economy a better and more balanced base going forward.’
Over three years to the end of September 2016, the BGF China fund returned 31.99% in US dollar terms. This compares to a rise of 2.87% by its Citywire-assigned benchmark, the MSCI China 10-40 TR, over the same time frame.