IN THE RED
As China’s economy slows considerably, investors are looking to take shelter elsewhere, writes Nick Ferguson
The slowdown in mainland china’s growth has not come as a big surprise, given the global economic environment, but the government’s response has surprised some investors, who have become used to China’s consistently strong economic growth.
Needless to say, trouble in China has knock-on effects in Hong Kong. The city is famous for being dominated by two asset classes—property and stocks—and high-net-worth Hongkongers typically have substantial exposure to both.
Property values in particular are suffering as Chinese tourists and real estate investors spend less money in the city. That is good news for first-time buyers and renters, but it is bad news for high-net-worth individuals, who generally have substantial property holdings.
So far this year, the government has tried a wide range of policy solutions at its economic woes, and none of it has worked.
For the first time since economic liberalisation began, China has weakened its currency against the dollar
“I think China’s economy is decelerating,” says Michel Lowy, co-founder of SC Lowy, an independent investment bank in Hong Kong. “They’re doing everything possible. They’ve pumped in more money, put trillions into the stock market, devalued the currency, cut rates and put in measures to boost the property sector. It’s reminiscent of the Asian financial crisis.”
China has been growing at more than 7 per cent for almost as long as anyone can remember and the latest official data still shows 6.9 per cent growth.
However, the deceleration has prompted many people in Hong Kong to ask some tough questions about the mainland’s future. While the brave might see the turmoil as an opportunity to pick up bargains at rock-bottom prices, for most investors it has signalled that now is the time to diversify away from Chinese assets, if they haven’t already.
“There’s a realisation that things are not going to recover very quickly,” says Ian Pollock, the managing director and regional head of ABN AMRO Private Banking in North Asia. “It’ll take some time, and as a consequence of that people are
looking at other geographies and other asset classes.”
Immediately after the global financial crisis, when China continued to boom despite a currency crisis in the eurozone and an insolvent banking system in the US, it was common for outsiders to see China’s centralised economic stewardship as advantageous, allowing policymakers to focus on pragmatic progrowth policies.
While politicians in the US struggled to agree on policy choices and Europeans faced the collapse of the euro project, China was decisive. That helped growth to stay high, but a slowdown now seems inescapable.
Indeed, the smart money is betting on a long slump and a slow recovery that looks much the same as that faced by the Western economies. This is a potential problem
After strengthening 25 per cent from 2005 to 2014, the renminbi has weakened more than 5 per cent
for anyone hoping to earn decent returns during the next few years. After taking inflation into consideration, interest rates in the US and Europe are basically zero, meaning China was one of the last places where reliable returns were available.
Until recently, Hong Kong investors had a simple formula for profiting from the gradual opening of China’s economy: buy renminbi and hold it on deposit.
This strategy would typically yield a 3 per cent return on the deposit, plus any appreciation in the value of the Chinese currency, which has been a one-way bet since China started to relax controls on the renminbi during the past decade.
The logic of this investment strategy was simple and compelling: China’s currency had been maintained at an artificially weak level as it sought to export its way out of poverty, but as it transitioned to a more balanced economic model the currency would inevitably strengthen to give consumers greater purchasing power—and investors could piggyback on this one-way move for easy profits.
That one-way bet has now reversed, with the People’s Bank of China devaluing the renminbi during August in response to an economic crisis that has been slowly unfolding all year—a situation that many market watchers have been calling the “new normal”.
“In the past people would buy renminbi for appreciation, but it’s not the same story anymore,” says Steven Lo, global market manager at Citi Private Bank. “We have also seen interest in A shares and H shares slowing down, so what else can investors do? Well, there’s a whole bunch of things.”
In particular, Lo says that wealthy investors in Hong Kong are looking for assets that have been over-sold. “For example, oil prices have
come down, but when you look at oil company stocks they have taken a beating already,” he says.
That selling pressure is certain to unwind at some point and private bankers are helping clients to capitalise on these types of opportunities using structured products that can boost returns and provide certain types of protection.
US stocks in general (as well as US real estate) are also growing in popularity for investors looking for returns as the dynamic American economy shows off its resilience. It is notable, for example, that almost all of the world’s most iconic tech companies are from the US, such as Google, Amazon, ebay, Facebook, Twitter, Instagram, Gopro, Snapchat and so on.
Such companies are the engines of future growth. However, China is perhaps the only other country in the world that can also boast a long list of huge tech companies—and some investors see a quicker recovery there.
“While we are advising caution in the short term, we’d say that based on valuations, we’re definitely back into territory where the market is probably closer to a low point,” says Pollock. “We would be looking for opportunities to start accumulating good quality securities, but the question then is what is the likely return compared to other opportunities in the short term.”
In the end, that is the question that will determine whether investors double down on China or seek diversification elsewhere.