China’s currency devaluation and the sell-off it sparked on world markets was one of the key events of 2015 affecting investment outcomes worldwide. But for Robert Horrocks, who co-manages the Matthews Asia Dividend Fund and the newly launched Matthews Asia ex Japan Dividend Fund, the reaction was overblown.
Beijing unexpectedly announced it was abandoning the link between the renminbi and the US dollar on 10 August, triggering a rapid 3% depreciation in its currency and in turn the first US equity market correction since 2011, with the S&P 500 Index losing 11% between 17 August and 25 August.
“What really rattled people was the devaluation of the renminbi. A lot of people took that as a sign that it was 1994 all over again, and a prelude to an Asian financial crisis,” says Horrocks.
But while conceding that there may be justified concerns over the problems China faces, Horrocks says: “I think the discussion of those concerns lacks nuance, and tends to be one-sided.”
Among the fears Horrocks considers to be misplaced are those over China’s shadow banking system – the financial firms that perform similar functions and assume similar risks to banks but are the informal banking sector – and China’s debt levels.
“People will talk about shadow banking systems, for example, but without mentioning that in China, the shadow banking system is about 40% of GDP. The global average for an economy is more than 100% of GDP.
“So the shadow banking system in China is actually not that extensive and the rates that companies have to pay for loans are not unrealistic.”
Shadow rates
“I remember talking to one southern (Chinese) property developer who was taking loans from the shadow banking system. He was paying interest rates of 15-18%, when the state-run banking system would be giving money at 8%,” says Horrocks.
The central bank sets a lending quota for the banks to increase liquidity and guide credit flows. He added that the “shadow system was at least trying to set a more realistic interest rate”.
As for debt levels, Horrocks says that although a lot of local government debt in China is of relatively poor quality, it has to be backed by central government. “If it took on all of the local government debts, central government debt in China would still be less than 100% of GDP,” he says.
