Janus Capital says China's debt sustainable but sees more yuan devaluation
China’s ballooning debt is sustainable, and investors should expect policymakers to devalue the renminbi by 5 per cent over the next three years as the country manages its economic transition, according to one Janus Capital fund manager.
Treasurer Scott Morrison last week voiced concerns about China’s elevated debt levels and its potential effect on the Australian economy, joining high profile investors such as George Soros and Black Rock’s Laurence Fink in foreshadowing trouble from China’s 27.4 trillion yuan debt pile earlier this year.
But Singapore-based Hiroshi Yoh, portfolio manager at Denver-based Janus Capital’s Asia equity fund pointed to the fact that 97 per cent of the country’s debt pile was held domestically.
“I recall the same concern about Japan in 2005. At the time Japan debt to GDP was 300 per cent, and people said ‘this country is going to go bankrupt’. It’s now 400 per cent,” Mr Yoh said in an interview with The Australian Financial Review. Like China, most of Japan’s debt was domestic owned.
“Is China at 300 per cent debt to GDP going to blow up immediately? No.”
The biggest risk to its sustainability is capital flight, which ramped up at the beginning of the year as ordinary Chinese citizens sought to exchange their currency on fears of further devaluations of its currency, but capital controls have since been introduced to limit the funds able to be exchanged.
With bets rising that the US Federal Reserve will lift interest rates before the year’s end, the strengthening US dollar has led to concerns that Chinese policymakers will repeat last year’s snap 2 per cent depreciation, a move repeated over a series of days in early January, both times rattling global markets.
Derivative markets are taking bets a devaluation of the onshore currency is imminent following months of calm in the lead up to the G20 summit that begins on Sunday, according to Bloomberg.
However, BNP Paribas senior economist for greater China Chi Lo wrote in a research note that the market is getting used to more volatility in the renminbi, the People’s Bank of China had become better at communicating its intent, and outflows had eased.
Though a 5 per cent yearly devaluation may sound like a dramatic figure, Janus Capital’s Mr Yoh says it is a necessary move to maintain, rather than increase, its export market share.
“I think the renminbi will continue to devalue by about 5 per cent every year over the next three years until they really complete this transformation of the economy from investment driven to more consumption driven economy,” Mr Yoh said.
China needs to maintain its declining export market share to help manage its transition, in light of low value added manufacturing moving to places such as Vietnam and the Philippines, he said. China’s exports fell a worse than expected 4.4 per cent in July in US dollar terms, according to official data.
“I don’t think they can gain any more market share. Their intent is not to lose it. In our view, to maintain that market share, they will continue to weaken the currency,” for at least the next three years, he said.
At the top level, the country is also caught between the old and new ideas of growth between its policymakers. While President Xi Jinping has made it clear that his focus is on reform, rather than stimulus, at the provincial level, many still belonged to the “old school” where GDP growth was the be-all and end-all. China has an official GDP target of 6.5 to 7 per cent for 2016, but Mr Yoh expects a more moderate 5 per cent growth.
“They only have one target, and that is GDP growth at all costs. That is no longer the target for the new leader,” he said.
In President Xi’s second term, Mr Yoh expects to begin to see a shift that will lead to reforms and a move away from stimulus.
“It will be one of the key milestones in modern Chinese history,” he said.
The story Janus Capital says China’s debt sustainable but sees more yuan devaluation first appeared on The Sydney Morning Herald.