A man walks past the Agricultural Bank of China Ltd., the nation's third-largest lender by market value, as government cracks down on lending to curb loan expansion. (Photo : Getty Images)
Analysts made a mistake when they said that the China's credit bubble could be a major potential risk for investment in 2017. Instead, it should be seen as an opportunity to buy stocks and make money out of it, according to an expert at the one of Asia's biggest asset managers.
An article by marketwatch.com quoted Ken Wong, Asian equity portfolio specialist at Eastspring Investments in Hong Kong, as saying that China's credit bubble is not an issue, even with the debt-to-GDP ratio at 250 percent and instead advised investors to buy Chinese assets, which are now cheaper.
"We are not overall concerned, but I think a lot of the time, fund managers only look at the headline debt number. They don't look at the details and see that corporate borrowing is slowing down, deleveraging is happening, and nonperforming loans are falling," Wong said.
"These are all things that investors need to realize. Expectations are very low for China right now. Equity valuations are also very low, and that's a perfect recipe for markets to recover," the fund manager added.
Currently, many stock investors from Europe and the U.S. are apprehensive about China, especially when Goldman Sach's chief economist said last week that the global economy is at risk due to the rapid growth of China's debt, which is being monitored by its Asian team.
Wong, however, said that in recent years, corporate borrowing in China has already dwindled. In 2014, it reached its peak at almost 90 percent for the A-shares market, and declined to 75 percent at the end of the third quarter last year.
He said the trend shows that the corporate sector is trying to address the problem and has made efforts to improve the Chinese economy.
"There's always been concern about Chinese debt, but the thing is, China has not blown up. Five years ago, people were talking about how China was going to blow up because of its high level of credit and everything else, but it continues to operate at a fairly strong growth rate, from an economic standpoint," Wong was quoted as saying.
Last year, Chinese stocks slid at the global market, driven by the slowing economy and the yuan's devaluation.
In January last year, the Shanghai Composite Index declined by 23 percent, its biggest monthly selloff, and has not yet recovered.
Wong added that this year, corporate profit is expected to grow by 11 percent to 12 percent. The forward price/earnings ratio for Chinese stocks is 11.8, while for 17.6 for U.S. stocks and 14.7 for European equities.
"So when you look at China from a valuations standpoint, it's much lower and much more than interesting than other places," Wong explained.
"We suspect that a lot of investors that have been overly concerned about China will start to realize the opportunities that are available here."
But there also other risks that some investors worry about, such as the threat of a trade war between the U.S. and China and the effect of the 45 percent import tariff on Chinese good that President-elect Donald Trump made as a campaign promise.
China's problems are also compounded by the strengthening of the U.S. dollar, as China has massive debts in U.S. currency, which amounted to $1.12 trillion as of October last year.
Early this month, the U.S. dollar posted its 14-year high, in anticipation of higher inflation and the increase in interest rates this year.
According to Wong, if the trade war happens and the U.S. raises the rates faster than expected, the stocks of many Asian countries may suffer.
"But that's a worst-case scenario. We don't expect something that drastic will happen in the short term," Wong said.
