Managers have warned of a correction in Shanghai A-shares and Chinese banks after China’s moves to tighten monetary policy.
According to Ben Funnell, a long-only portfolio manager at GLG Partners, China’s powerful National Development and Reform Commission (NDRC) has resisted calls to tighten policy, on the grounds it could drag on growth.
But the People’s Bank of China has convinced the commission that inflation presents a serious problem and immediate policy tightening is required.
According to Funnell, there is evidence that investors have been stockpiling physical commodities as they find ways to use the excessive amount of money in the economy.
In combination with China’s 20% wage inflation, Funnell says commodity stockpiling is driving up the price of basic goods.
As a result, the authorities will raise the amount of money banks must hold in reserve. Banks are not typically holding more reserves than required, Funnell says.
These measures mean less money will be available for lending, especially as three of the major banks are already lending out 75% of their deposits, the maximum permitted. (article continues below)
Funnell says GLG has reduced its positions in Chinese banks, but has turned more positive on the Hong Kong markets as money flows out of the Shanghai-listed A share market.
James Chong (pictured), the manager of the Martin Currie China fund, is also heavily underweight financials and has only a 4.9% holding in A shares.
He says the government has already introduced price controls to dampen speculation in the commodity markets, which should keep inflation relatively low.
However, he cautions this will squeeze margins for consumer food producers and retailers. He has shorted areas of the sector in his absolute return fund.
Food producers and retailers will have higher wage costs, he says, but they will be unable to pass some of them on to consumers in higher food prices.
In general, Chong says the government is trying to push businesses and consumers away from spending too much money on basic goods.
The state wants the private sector to focus on higher-end products and domestic consumption, he says.
Chong says Chinese companies are increasingly focused on building brands and charging premiums for reliable products, which will boost their margins.
According to the manager, the government is trying to push people and companies away from buying the same products rather than new ones, boosting productivity.
Overall, Chong says price controls are just one of several temporary measures China’s government can use to cool asset prices.
But although the government raised property taxes to dampen speculation, he says it is unlikely this will extend to equity markets.