Renowned Wealth Management House Tells Investors: Avoid China

Tom Burroughes

26 November 2013

Avoid China – that’s the recommendation of the investment boss at Rothschild Wealth Management. A build-up of debt in the world’s second-largest economy is unsustainable and brings with it the risk of a credit crunch, it says.

The blue-blooded investment and banking house, with over £4 billion of client money, said the amount of debt in China has surged to around $23 billion from $9 billion in the past five years, a situation that cannot persist and could end messily.

“We are very concerned about the situation in China and believe the credit bubble is likely to burst at some point. In November there was an important meeting for the Central Committee of the Communist Party of China, the highest political authority,” Dirk Wiedmann, head of investments at , said in a note.

“During the Third Plenum President Xi rolled out his blueprint for the central government reforms. The 46-page document released after the plenum included everything from weakening the role of state owned enterprises to liberalisation of interest rates and capital markets as well as a relaxation of the one-child policy. The indicated reforms are a step in the right direction but are not a panacea to the country’s credit problems and slowing growth,” he said.

Wiedmann is worried that China’s economic growth has been driven by debt, which has risen by 20 per cent a year over the past decade; this debt lies predominantly with local governments and non-state-owned businesses, and now stands at more than 200 per cent of the country’s gross domestic product.

China reform plan reactions

The comments come at a time when most wealth management firms such as UBS and Coutts have been broadly positive about the recent package of intended reforms from Chinese policymakers, seeing them as going further in making supply-side reforms than expected. Even so, an enduring worry for some managers has been the amount of leverage in the Chinese economy, such as its property sector. Chinese equity markets have lagged those of the developed world, including Japan, this year.

“Although equity valuations appear cheap, we advise avoiding the temptation of looking for short-term, tactical investment opportunities. The market could fall rapidly at the first signs of any problems,” Wiedmann’s note said.

“Instead, investors should ensure their portfolios are well diversified by incorporating uncorrelated instruments and assets could help to cushion the impact of the credit bubble bursting as well as other associated risks. They include specialist macro hedge funds that follow the situation in China closely and have the ability to gain exposure in ways that could deliver attractive returns if the worst-case scenario plays out. These investments should offer diversification when China’s financial system begins to show increasing signs of stress,” he said.

We recommend investors avoid direct exposure to China and protect their portfolios against the associated risks,” he added.