China pushes growth in Asia but sustainability is doubtful

China has driven growth in the Far East, but are the cracks in its recovery widening?

Managers’ concerns over whether China’s economy could falter are casting doubt over a euphoric’ attitude Chinese growth has engendered in some Far Eastern investors.

Rob Brewis, emerging markets fund manager and principal at BDT, says China has without doubt exerted a positive effect on the Far East recently, saying China is the “engine for the whole region.”

“Some people say this is negative, because no-one can compete, but I do not think so. There is a lot of intra-regional trade but it is two-way. If China is growing it is good for both sides,” Brewis says.

Experts note Chinese domestic demand is also far healthier now than in the past, with large amounts of savings waiting to be tapped. But cracks in the recovery could widen, they add, turning bull into bear, and incidents in China could have knock-on effects on recovery in the West.

Despite “quite a lot of euphoria around at the moment,” Brewis says, “there is a danger that things are a bit overcooked.”

China and the US rely on each other, the former for growth and the latter for sustained recovery, according to John Hatherly, head of global analysis, M&G, which forms part of the group of hedge fund provider UBS.

“The US economy has been kept going through consumer spending, much from cheap manufacturing, of which China is the lion’s share,” he says.

This relationship has proved positive for China, which has seen the creation of an export manufacturing sector as companies move factories there for cheap labour.

However, Asante voices concern China has bowed to pressure to open to market valuation the yuan’s exchange rate, currently pegged at 8.3 to the dollar. China has been a growth driver for the whole of Asia, and is now the main source of exports for some countries in the region, but it is also a source of competition and risk, according to Rory Landman, who provides the macro overlay for Thames River’s emerging markets hedge funds.

Cheap labour in China has forced other Asian countries to move up the value-added chain and this emerging world giant has posed competition for exports to the West.

It is also such a major factor in the region’s growth that if its economy were to falter, recovery across Asia could be at risk. The weak dollar with China’s currency pegged to it increases pressure on Asian economies, which could be forced to peg their own currencies to China in order to remain competitive, adds Landman.

In the current climate, most opportunities for hedge fund managers can be found in their long books, and unless something threatens recovery that is likely to continue, he says, although there are short-term plays in cyclical rotations between domestic and export stocks.

Taiwan looks particularly interesting, having just reduced red tape surrounding foreigners investing in domestic stocks, says Landman. Indices that had restricted the size of weighting in Taiwan due to its barriers to foreigners will now lift them leading to Taiwan becoming a more significant part of indices and encouraging index investors to place more assets there.

North Korea, because of its disputes with the US, and India, due to the Kashmir problem, both pose geopolitical risks to the region. The only way to avoid losing in portfolios if those risks become more significant is to keep a low exposure to them, says Landman.

Tremont’s Barry Colvin, who advises on Matrix’s Bastion and Conservative Approach Strategy funds of funds, notes although emerging markets have performed “exceedingly well this year,” emerging markets funds are “still primarily long-only investments, subject to the ebbs and flows of their marketplace. They are largely still directional allocations in your portfolio.”

Key Points
Managers’ concerns over China’s economy cast doubt over a euphoric attitude Chinese growth has engendered in some Far Eastern investors.

There is concern over China’s opening to market valuation the yuan’s exchange rate, currently pegged at 8.3 to the dollar.

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