China: A Buying Opportunity

There are three things the financial press loves to hate: big banks, hedge funds and China. Any time one of these hits a rough patch, journalists seem to have difficultly containing their schadenfreude.

Recently China has been in the spotlight, being described as a credit-fuelled bubble ready to burst. It is certainly true that following a decade-long stretch, China’s breathtaking growth rate is moderating, but one must be careful not to draw too many conclusions from individual anecdotes.

There is no doubt that in certain regions local Chinese governments have allowed debt to expand at unhealthy rates. Unlike the often-laissez-faire approach of Western economies, however, the Chinese government seems adamant about forcing those regions to sharply correct. Inevitably this will lead to periods of economic hardship in those local economies, but thinking that this will spill over to the rest of China is the equivalent of reading about Detroit going bankrupt and believing that all of the U.S. is in trouble.

After all, the most critical indicators are telling a positive story: GDP continues to increase at over 7% per year with retail sales growing at double digit rates as the Chinese economy rebalances away from investment-driven growth. Industrial profits are up year-over-year, inflation remains well contained, and foreign reserves have continued to grow (to over $3.4 trillion as of July). Even if the credit situation in China worsens, the government has many tools at its disposal which it can deploy in short order.

At the same time, the MSCI China Index is down 8.6% for the year and today trades as a forward PE of 9 relative to 15 and 13 for the S&P 500 and the MSCI All-Country Index, respectively. So for long term investors who focus on the big picture, we believe this could present a buying opportunity.