Neptune: China's Debt is Not a Problem

The International Monetary Fund has expressed concerns about China's debt levels - but Neptune's Doug Turnbull says the debt is concentrated and not a problem

Emma Wall 14 April, 2016 | 2:59PM
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Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by Doug Turnbull, Manager of the Neptune China Fund.

Hello Doug.

Doug Turnbull: Hi Emma.

Wall: So things are looking pretty positive for China, we have not been able to say that for a while. The Shanghai Composite is above 3,000. What's caused this to bounce?

Turnbull: Well, without wanting to kill peoples' optimism. I would, first of all, say don’t look at the Shanghai Composite. This is not really a stock market in the same way we understand them elsewhere. It's not a discounting mechanism of future profitability.

It's much more a gauge of domestic retail investor sentiment and given the amount of involvement that the Chinese authorities have in this market trying to control it. I'd say it's a pretty broken market. It's giving a pretty misleading impression.

However you are also right, things are looking a little bit better in China. Actually the picture of the longer term has been bifurcated. And it's been bifurcated for a long time. Old China, you think the heavy manufacturing that old low cost, built for export model. That’s been doing badly for a long time. That’s been either flat or sometimes in recession.

Whereas what I'd call new China a more consumer driven economy is growing really quickly. Retail sales are growing at 10%. Think car sales growing at about that level, plane tickets growing at 15% a year. The number of packages being delivered around China. That’s growing at 50% a year. New China's actually looking pretty good.

Wall: And of course all of those are investment opportunities?

Turnbull: Absolutely. There is a lot of good long term structural opportunities in there. That can quite often get masked by people focusing just on the old. Seeing it breaking down and extrapolating that out for the whole economy which is really misleading.

Wall: And what about the currency then, because there's been some movement against the dollar, actually the Chinese currency is looking pretty positive.

Turnbull: The authorities have really stepped in, in order to stabilise the currency. With over $3 trillion in FX reserves they have got the fire power to do so.

Wall: Talking about the economy we've had some figures from the IMF recently saying that actually on the short term, doesn’t mean that they are going to have a hard landing. China growth looks good. But on the longer term there are some concerns about debt levels.

Turnbull: Yeah, absolutely. So what they have done in the short term, is basically put in a bit of a floor to the growth and we think 6.5% is currently the minimum growth level, that policy makers will accept. If it dips below that, which it did later in last year according to our numbers. Then they'll put a little bit more support, we've seen that in terms of some more liquidity coming into the economy. We've seen that in terms of planned fiscal expenditure start to pick up. Now that in and of itself is a short term positive, could there be long term negatives attached to that. Possibly.

However those negatives are really tied up in the amount of debt. China's debt at an aggregate level is not too scary, but it's certainly high. It's around 250% of GDP. However the detail, the nuance of that is actually much more important than the aggregate. It may not provide such exciting headlines but actually digging down into that details where we find the facts. And that is that Chinese debt is very, very concentrated. Something like 45% of loans owed to the property and property connected sector. Actually the household is massively underleveraged. Debt to income in Chinese households is about 60%, that’s under half the level we have in the U.K. Likewise government debt at about 55% of GDP is really low for pretty much any large economy. Also the private sector has very limited levels of debt, it's very concentrated in these big ugly state companies and a lot in the real estate sector.

Wall: Doug thank you very much.

Turnbull: Great pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Liontrust China C Acc GBP1.96 GBP-0.53Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar