China market a bubble waiting to burst
The Chinese A-share market is a bubble waiting to burst, according to Schroders head of Asian equities in Singapore.
Speaking at a briefing in London, Lee King Fuei said China’s structural problems “continue to be a worry”, therefore putting its economy as risk. He pointed out that China’s credit had grown by nearly 90% since 2006, and was yet to be unwound.
On top of this, the country still has a whole decade of over-investment to be absorbed, which gives Fuei reason to believe “China is something investors should avoid at this point in time; it’s a bubble waiting to burst”.
He highlighted a number of signs that demonstrate the current landscape of the country’s A-share market:
1. The Shanghai SE composite index rose by 60% in the last 6 months
2. Trading volumes hit a new daily peak of RMB 1trn in December
3. There was an oversubscription in Initial Public Offerings (IPOs) in the last two months of 2014
4. As of July, margin financing doubled, accounting for 20% of the daily turnover
However, Lee said some of the liquidity of the Shanghai-HK Stock Connect program – which was launched in November last year – had the potential to alter China’s current economic environment.
Meanwhile, the country's economy expanded 7.3% in the final quarter of last year, recording a 7.4% expansion for the year as a whole.
Looking ahead, Schroder’s outlook for China is for growth to slow again in the first quarter of 2015 as fiscal reforms and falling land sale revenues hit local governments’ budgets.
Turning his attention to Asian markets across the board, Lee said it had been “a fairly mixed year”, with the rapid growth of urbanisation and industrialisation, alongside low oil and commodity prices.
“Low oil prices and falling commodity prices mostly benefit Asia,” he said. “Low oil prices mean the current account balance becomes stronger. However this is struggling against quantitative easing.”