The big challenge confronting China can be found in the nonperforming loan portfolios of its banks and kindred financial institutions. That enormous pile of deadbeat loans is the legacy of late 2008-2009, when exports dried up and the spooked rulers of the command economy ordered the banks to seriously step up their lending -- no ifs, ands or buts. The banks dutifully complied with an awesome $1 trillion in fresh lending.
Much of that huge mountain of loans has fallen into the nonperforming category, which translates from the polite banking parlance into delinquency, big time. To avoid a financial meltdown, Harald expects, Beijing will raise capital-adequacy requirements substantially during the first few months of 2011, conceivably in incremental steps to cushion the pain. Since he anticipates Chinese banks will have trouble raising capital, he expects a large-scale shrinkage in lending.
Chinese banks, he emphasizes, aren't suffering from insufficient liquidity. Rather, he warns, the danger to the country's banking system is insolvency. In the current lineup of problem banks around the world, he would rank Chinese banks as the most troubled, with European banks next, followed by U.S. banks and Japanese banks probably holding down fourth place.
As I mentioned the other day there are plenty of other ways in to China such that a very unhealthy sector (that being financials) is easily bypassed. China is an important investment destination. It has matured some and will continue to do so. For a while there in the last decade it did not matter what you bought, it all went up. This will happen again in other destinations but probably not China. The tone of my comments of course has been the need for selectivity. Personally I want no part of the banks, I also want to avoid companies that rely on US and European consumers (meaning exporters) and I've been no fan of reverse mergers either.
I think things like energy, materials, consumer stock (things Chinese people will spend money on), industrials and utilities are the best places to look, which obviously gives plenty of choices to consider.
The above is not new from me, I tend to believe there is at least some value to repetition. Case in point from yesterday's comments a reader expressed concern about getting "killed" even in short duration fixed income. While I don't know what his idea of getting killed is or what he owns I asked if mutual funds were the problem. I've been repeating the same thing about fixed income for ages now which is that prices have been at all time highs (or thereabouts) for a long time. Buying high is buying high which means there is a threat, an obvious threat, to prices going down and that whenever prices do go down it will hurt long dated paper the most. It will also hurt funds which have no par value to return to. Our largest exposure has been to short dated individual issues and short dated individual foreign sovereign issues. We have a little exposure to things going down during this but that exposure is small for exactly the reasons unfolding now.I've talked often about not wanting to take a lot of risk in the fixed income portion of the portfolio. To my way of thinking it makes more sense to take on risk, more correctly I mean volatility, in areas like materials stocks or energy stocks as examples, not from bonds.
As I say, I do not know what this one reader is really experiencing but bigger picture a meaningful increase in interest rates is going to hurt a lot of people yet a meaningful increase in interest rates, even if we don't know when, is a very obvious call. The ten year treasury note currently yields about 3.33%. In the summer of 2006 the two year treasury could be had for 5%.
2 comments:
http://bit.ly/fzWUAZ This is a link to a dynamic yield curve. You can see short term yields move much more than longer term yields. Someone in the accumulation phase should welcome rising rates, not fear them; provided that interest is reinvested and the portfolio's maturity is appropriate.
Relatively broad index ETF's that capture the more promising segments of China's economy include ECNS and HAO but I've reduced my Chinese holdings somewhat this past year since I expect the turn to a more consumer oriented society to get pretty bumpy and it is not clear to me how much power the 'old guard' has; e.g., party apparatchiks with significant interests in export, finance and industrial firms.
As to rising yields, too many pundits with a penchant for alarmist rhetoric focus on inflation as an 'evil' and neglect to inform their readers that rising yields can also be associated with a strengthening economy and a more optimistic investing scenario; e.g., pure supply and demand, money moves from safer assets to elsewhere. What causes the yield curve to flatten v. steepen or rise v. fall makes a lot of difference in how its message can be more profitably interpreted.
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