Talk about Chinese property developers invariably brings about the spectre of property bubbles, but Thomas Kwan believes naysayers are forgetting a key piece of the puzzle.
‘People talk about a property bubble, but they forget about affordability,’ says Kwan, noting that over the past 5 years, income growth has kept the affordability ratio stable.
According to Kwan, previous housing bubbles were often preceded by a sharp deterioration of the affordability ratio, something not seen in China. ‘Income grew at a very fast pace in China, so we still like the property sector, although we remain wary of some developers who rely heavily on trust loan financing.’
Kwan is head of fixed income at Harvest Global Investors, and has managed Harvest RMB Fixed Income Fund - Class A since February 2012.
Real economy winners
Another sector where he sees value is in industrials, which were sold down as China’s GDP slowed. According to Kwan, the selldown has unearthed value. ‘Slower growth has been priced into the industrial space. The industrial space has no exposure to the shadow banking sector, and the PBoC has made very clear they want to support companies that contribute to the real economy, which includes industrials.’
Hong Kong-based Kwan is supported by a team of around 50 company analysts based across Beijing and Hong Kong. They feed company ideas into Kwan who then decides whether they make it into his portfolio.
USD vs RMB
The stability of the RMB against the USD is another reason Kwan cites for being bullish on RMB-bonds.
‘If you look back at the 2008-2009 global financial crisis and the 2011 European debt crisis, the RMB was the only currency that remained stable against the USD. So not only is the yield in the CNH market attractive, but it’s rare to have a currency that is so stable against the USD in a crisis environment,’ he argues.
While China’s capital account remains relatively closed, Kwan argues this adds to the stability of the financial system relative to other EM economies.
This, he says, is especially helpful in a world of loose liquidity. ‘With the exception of China, EM economies received a lot of fund flows from USD-based investors over the last few years, and if these flows reverse China is hence least exposed to this risk, because the capital market is relatively closed. Time and time again, this has brought stability to China’s market.’
Year-to-date, Harvest RMB Fixed Income Fund - Class A has returned 3.8% against the benchmark China Bond Aggregate TR return of 3.69%.