‘The past five years would have been an ideal time to restructure the Chinese economy,’ says Caroline Maurer, fund manager at Henderson Global Investors (Singapore).
But the European crisis put economic restructuring plans on hold, as the Chinese government took measures to limit its impact. ‘The government needed to prop up the economy in the short-term,' says Maurer, ‘so they didn’t implement reforms as early as investors were hoping for. The key task now is for the government to gradually push through reforms now.’
Maurer manages the Henderson Horizon China Fund. Previously managed with Andrew Mattock, since mid-January 2013, Maurer has taken on responsibility of the portfolio. While Mattock is not directly responsible for the portfolio, both managers remain on the Asia ex-Japan hedge fund team at Henderson Global Investors.
'You need household income to grow faster than other parts of the economy,' says Maurer. 'They have to keep economic growth steady at a decent speed of around 7%, with greater emphasis on consumption. Investment will continue to grow, but consumption will grow faster.'
While China remains some distance from its target to be a consumption-based economy, there are signs that reforms are taking effect. 'Last year was the first time China’s GDP slowed without unemployment issues cropping up. Low end income continued rising, and income distribution has been favourable to households at this point of time,' says Maurer.
Other reforms include financial reform, where China seeks to diversify sources of credit away from banks, which has led to concerns of the rise of a 'shadow banking' system. Maurer notes, ‘In the past few years, bank lending as a proportion of total funding source in China has been falling, and other funding channels, such as bonds or wealth management products have emerged as alternatives.'
'There’s a lot of debate over shadow banking recently and how they are regulated, but I would say diversifying sources of funding is a necessary process in developing the sector, and this has the added benefit of lower NPL (non-performing loans) growth in many banks, while providing more financing options for corporates.'
Energy is another area Maurer is focusing on, as reforms lighten the distortionary effects of government-imposed subsidies. ‘Many energy producers were made to charge distorted prices in order to support economic growth and lower inflation numbers. This has held back IPPs (independent power producers) from earning a decent profit.'
'More recently, the government has allowed better price discovery and this will encourage better profitability among IPPs, especially since some companies are heavy users of energy, and having them pay market price for electricity would enhance energy efficiency in China, which is very low.’
Where Maurer sees hreadwinds for companies is through rising cost pressures on low-end product distributors, although wage pressures must be taken in context. ‘Shoe manufacturers, apparel manufacturers, these are all highly geared to labour costs and wage inflation. So we have to consider if they are gaining market share overseas, whether they’re moving up the value chain, whether they can effectively digest labour cost increases.'
'We aren’t into these types of companies. We’re not worried about the sector because you do see companies growing their market share, perhaps not in the low-end consumer space, but in industrial goods to emerging markets,’ says Maurer.