China Deleverages

China has not collapsed. There is no financial crisis in China. Instead, China is undergoing a gradual deleveraging of its financial sector. As far as we can judge from published statistics, this has been successfully managed by the authorities and confidence has returned to the Chinese market. The RMB is strengthening against the US dollar and foreign exchange reserves have climbed back above US$3 trillion. The money market has tightened. 3 month Shanghai Interbank Rate has risen to 4.43%, and 7-day reverse repo rate to 2.81%: Both the Producer Manufacturing Index and industrial profits are rising gradually. GDP growth is likely to continue at 6% plus in the 4Q, although much will depend on the property and construction sector, which accounts for nearly 20% of GDP.

We are planning to launch our “China Hedged Investment” (CHI) Fund in October. We continue to believe that exceptional investment opportunities exist in the healthcare, tourism, education, and internet sectors.

In India, there has been some volatility over the summer but the Rupee remains strong and corporate earnings are growing over 15%, especially in the small and midcap sector of consumer goods.

Among the losers in August were the public sector banks, which fell 11.6% on news of increased nonperforming loans. It is worth emphasizing that the private sector banks, such as HDFC, ICICI, Yes Bank, among others which we own, have not been so negatively affected. In fact, they continue to report strong profit growth and relatively low NPLs. During the month of August, the Reserve Bank of India also cut its policy rate by 25 basis points, taking the Repo Rate to 6%, in line with market expectations. Inflation is forecast at 3.5% for the next year. The monsoon has been quite satisfactory, and India’s agricultural sector continues to do well. However, the impact of demonetization and the new Goods and Services Tax (GST) introduced July 1st is now visible in the GDP growth falling to 5.7% for the quarter ending June vs. 6.9% in the previous quarter. This may continue into the next quarter ending September.

By contrast, the Pakistan market continues to vex long-term investors with its heightened volatility (caused mainly by the political fallout after the Prime Minister’s resignation and a large US fine against Habib Bank): As a result we have reduced our exposure to 6%. Sri Lanka (6.5%), Vietnam (5%), Bangladesh (3%), Mauritius (2.5%) and Naspers in S. Africa (3%) continue to outperform and provide excellent diversification to the core commitment in India.

As the US economy continues to be remarkably resilient (3% GDP growth in the last quarter), despite Hurricane Harvey’s impact on energy, agriculture, and insurance, as well as cancelled flights, and disruption in the distribution of food, and other goods due to the floods, this will certainly affect Asian economies, which continue to be dependent on US demand. However, China now accounts for 8% of Asian trade.

Even commodity prices have strengthened in the past 3 to 6 months.

In “The Rational Optimist,” Matt Ridley eloquently makes the case that humanity’s worst fears about the future are not usually realized; that in most fields – medicine, nutrition, education, longevity – human life is improving steadily. The “outliers”, or exceptions to this optimistic assessment of the global economy, such as North Korea, only make it more convincing.  Somehow or other, the threat of Kim Jong-un’s crazy behaviour (especially this week in directing a missile over Hokkaido), will have to be neutralized.  Asia continues to be a region of extraordinary growth and rapid reduction in poverty (especially in China and India).



Robert Lloyd George
8 September 2017
Hong Kong