China “not all doom and gloom”, says Source

Sep 21st, 2015 | By | Category: Equities

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China played no small role in August’s equity market sell off, but, according to a new report from European exchange-traded fund provider Source, there are a number of positives to the country that may be being overlooked.

It's not all bad news in China, says Source

More reliable economic data, solid bank funding levels and FX reserves are good signs for China, according to Source.

Commenting on the report, Paul Jackson, Head of Source’s Multi-Asset Research, said: “China is now one of the largest economies in the world, and its spending power helped drag the western world out of recession following the financial crisis. This appears to have come at a price, however, and the fallout is being felt not only in China but throughout capital markets worldwide. That said, as we looked more deeply into the data, we discovered that it was not all doom and gloom.”  

He added: “While the Chinese economy has almost certainly been decelerating, it was reassuring to see that the data produced in the country seems more reliable than many seem to think. This gives us greater confidence in being able to assess the prospects of China assets as well as the impact that Chinese fortunes may have on financial markets worldwide.”

Split between the good, the bad and the ugly, Source have identified where the country’s strengths lie and where investors may need to be wary.

The good:

  • Chinese data is not as bad or as manipulated as many people believe
  • Banks are 90% funded by deposits, and capital ratios are acceptable
  • China is self-financing and has massive external assets
  • If needed, FX reserves and increased government debt could cover a large debt ‘black hole’

The bad:

  • Total debt (230% of GDP) may both limit growth and present a systemic risk
  • The corporate sector has added debt equivalent to 50% of GDP in six years
  • Debt equivalent to 40% of GDP has been financed outside the banking sector since 2008

The ugly:

  • The Chinese yuan is expensive and could decline versus the US dollar
  • Chinese stocks are no longer expensive but recent policy actions suggest caution
  • China is unlikely to come to the rescue of commodity markets

Investors confident that “the good” will be sufficient to support the Chinese equity market in the near-term, and who are looking to add exposure to the growing Chinese economy, have a number of European-listed China A-shares ETFs available to them. These include the Source CSOP FTSE China A50 ETF (CHNA LN), the db x-trackers Harvest CSI300 Index UCITS ETF (DR) (RQFI LN), the Lyxor UCITS ETF CSI 300 A-Share C-USD (GBP) ETF (CSIL LN), the iShares MSCI China A UCITS ETF (CNYA LN) and the ETFS-E Fund MSCI China A GO UCITS ETF (CASH LN).

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