How to get the dragon flying again

China has already had its hard landing, says Shumin Huang, a manager of the JPMorgan Chinese investment trust. Now it must follow through on its initiatives to reignite growth.

FS Beth Brearley 160 byline

JPMorgan’s Shumin Huang, a manager of the £120m JPMorgan Chinese Investment Trust, says China has already hard landed and that the government must continue implementing a new set of priorities to fuel growth.

Huang says trade and production figures in recent years suggest a hard landing in China has already taken place, and the government’s fresh focus on social welfare, environment initiatives and improving infrastructure will be the main drivers of growth, with an emphasis on the quality of growth, not just quantity.

“There are a lot more infrastructure projects needed,” Huang says. “If the government could improve traffic congestion so that it is actually possible to drive into a city without sitting in a jam for hours, that will alleviate the pressure on property prices in city centres and urbanisation will continue.”

“The government has lots of tools to deploy economically and this is happening now, but the concern we have is although China has hard landed, if external conditions deteriorate there could be a counter shock which would have a negative impact in stock prices.”

However, she adds: “Valuations are now at a trough, back to the levels seen in late 2008/early 2009 during the financial crisis, so the downside is limited.”

Huang says that even though equities are at attractive valuations already, performance is capped by risk appetite, because in a risk off environment investors do not want exposure to China. This is despite China having the best combination of growth drivers and safety in the banking system of any Asian nation, she says.

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Indeed, Huang says over the past three years, earnings growth within MSCI China has not been reflected in the share prices, with stocks rerated as investors fear a potential banking crisis and the bursting of the property market bubble.

“There is a deviation from reality,” she says. “Yes China’s growth has seen a slowdown, but there are a lot of company-driven opportunities.

“We do not think there will be a financial crisis like there has been in the US and the eurozone. In the US, where some indices are near record highs, it is difficult to tell there is financial crisis, but in China the rating makes it looks like there is one, which there is not. So it is driven by investment perception. We do not think there is a high probability of a financial crisis in China given the healthy balance sheet of the government, people’s high saving rates and the decent capitalisation and high loan provisions of the banking system.”

“We do not think there is a high probability of a financial crisis in China”

Huang continues: “If you compare property prices in Bejing and Shanghai with other regions they are higher. However, the nationwide average is line with the global average so there is not really a risk. There were pockets where prices were pushed up too much in 2009 but these corrected in the past 18 months, and the property sector has outperformed over the last 12 months.”

However, the manager says the opening up of the Chinese markets to foreign investors should help “normalise” the market.

Huang says: “The government is keen to open up the market to foreign investors. Pension and insurance funds currently account for a very small part of the market. But this will help to counteract sentiment-driven retail investors in market.”

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The trust is run by a four-strong team of managers, with Howard Wang at the helm. Its policy is to invest in a collection of best ideas from the Greater China markets; Taiwan, China and Hong Kong. In China, the fund invests both in offshore-listed Chinese equities, such as Hong Kong-listed equities, and in the domestic markets’ A-Share funds, namely JF China New Generation fund and JF China Pioneer A-Share Fund.

Over the past year the trust has returned 20.5 per cent against the MSCI Golden Dragon index’s 21 per cent, while year-to-date it has made 10.7 per cent versus 10.2 per cent, as at 3 October according to Morningstar.

“The past year has been a perfect storm for Chinese equity markets,” Huang says. “Tensions in the eurozone have heightened and people are in risk off mode. Companies have also had issues with corporate governance, but it is more an issue of investor sentiment and perception.”

Year-to-date, Huang says many of the companies in the portfolio have done well, notably Tencent, China’s largest internet portal service and Hong Kong-based AIA (American International Assurance).

“We have owned Tencent for a long time. It is one of the best-performing holdings year-to-date, with a resilient revenue stream and profitability against the slowdown in economic growth. It is very on the ball with its execution and strategy, and has a gaming platform and a social media service – it is a one-stop service.”

Of AIA, Shumin says: “Many think that insurance companies in China are seeing a slowdown, but AIA is not about China but the whole of Asia. It has executed very well in different markets. Even in China where it is relatively small, it has done much better than its competitors.”