The Chinese market is potentially less vulnerable to tighter U.S. monetary policy. The Chinese currency and market are better positioned to withstand a rising-rate environment than many other emerging markets, given China’s current account surplus, ample foreign exchange reserve and low external debt.
To be sure, many of investors’ concerns are justified, and there are significant short-term risks for investors in Chinese stocks. These risks include the country’s unregulated shadow banking system and the risks associated with the inevitable slowing of credit growth. While an accurate estimate of the system’s size is difficult, even conservative estimates imply that it has more than doubled in size since 2008. In addition, one consequence of the China’s excess credit accumulation since 2008 is capital misallocation, or a diminishing economic impact from easy credit.
Meanwhile, headline defaults – although small and not systemic – from wealth management products and corporate bonds are signs that China needs to rein in credit growth before a possible bubble bursts. Finally, some of the reforms I mention above may be disruptive to markets in the near term, and like any value-driven investment call, my overweight to China may take a while to work.
But despite these short-term risks, I believe that Chinese stocks are worth sticking with over the longer term. You can read more about my country views in my latest Investment Directions monthly market outlook.
Source: Bloomberg, BlackRock Research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.