Fear of China bank crisis keeps Aberdeen alert

Fear of China bank crisis keeps Aberdeen alert

By Elva Muk | 6 March 2013 (48 minutes ago)

If the nation’s shadow-banking system blows up, banks will foot the bill, its managers argue. But they see opportunity in HK-domiciled firms exposed to Greater China consumption. Aberdeen International fund managers are fearful of a China banking crisis, but see opportunity in Hong Kong-domiciled firms exposed to Greater China consumption. Asian equities manager Kathy Xu argues one of the biggest downside risks to China’s stock market this year is the country’s shadow-banking, or private lending, system. As a consequence she is bearish on the mainland banking sector. “This area is not transparent nor strongly regulated enough,” she says. “If the shadow banking [system] burst, we worry what banks would have to pay the bills.” China’s shadow-banking sector is enormous, encompassing trust funds, wealth management products (WMPs), products from securities firms, underground lending and local government financing vehicles. Together it is estimated these account for Rmb22.8 trillion ($3.6 trillion), or 44% of China’s national GDP.

Only yesterday, China Banking Regulatory Commission (CBRC) chairman Shang Fulin reiterated that WMPs run by trust companies and banks do not fall under shadow banking because they are regulated. The CBRC had already stepped in after fears were voiced about a giant ponzi scheme.

But fund managers are mindful of the Lehman Brothers mini-bonds scandal that blew up in Hong Kong, given that banks were chief distributors of those ill-fated products.

Xu notes that WMPs lack transparency, with some even venturing into China’s under pressure property sector, and suggests they pose a great risk to the broader banking sector as a whole.

Nicholas Yeo, head of equities (China/HK) at Aberdeen International, adds to the concerns, noting that Chinese banks have not yet experienced a credit cycle, making it hard to know how well they can manage the risk of non-performing loans, particularly given the lack of data and track record.

But Yeo, who runs the firm’s flagship $2.8 billion Chinese equity fund, talks up Hong Kong-domiciled firms exposed to the Greater China consumption story.

“The key thing is the valuations of these companies are not as ridiculous as mainland Chinese consumption-related ones,” he says.

On the back of a sluggish A-share market for most of last year, Yeo had expected to see the valuations of good companies, which used to trade at around 20x forward earnings, trend down.

However, the market rebounded in the fourth quarter, with some consumption names returning to 30x. “The better ones have not yet de-rated enough in terms of valuation,” Yeo stresses.

He believes that investors have become too indulgent with “Chinese consumption” plays, using the term as a catch-all and driving up valuations to the point where they have been over-paying for growth.

As a consequence he favours Hong Kong retailers and consumption plays either with direct exposure to China’s growth, or those that benefit from its consumer power.

“How we play [China] consumption is: one, [Hong Kong companies] that have business in or are expanding into mainland China; two, millions of mainland tourist shops [in Hong Kong], so indirectly there is [Chinese] consumption.”

Yeo cites as an example Hang Lung Properties, a Hong Kong-listed developer with shopping malls across first- and second-tier cities in China where wealth is growing strongly.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: