Bhaduri explains: “In 2014 the credit-to- GDP ratio was close to 300% and shadow banking was expanding close to 40% per annum, so the credit uptake could lead to bankruptcy. During those five years the credit expansionary policies of the state meant the equity market did not really take off so 2009-2013/14 was fairly flat. Margin lending happened and it was more than 10% of market cap. That is the story of the equity market rally.”
Institutional investors’ direct exposure to Chinese stocks is likely to be limited given the nature of the domestic A-share market and most will have access through a basket of emerging market stocks. But, the recent crash will have spooked asset owners because of the repercussions on other stock markets, including other emerging areas.
THE KNOCK-ON EFFECT
According to Hymans Robertson, the crash and subsequent fall in bond yields pushed up aggregate UK defined benefit scheme liabilities by £30bn causing many to question the level of risk lurking in their portfolios.
“Our main message to sponsors and trustees is to avoid any temptations to rush into deficit recovery mode, which usually places an emphasis on investing in long-term growth assets,” says Hymans Robertson head of investment consulting John Walbaum. “This kind of long-term thinking is increasingly myopic for schemes looking up at a mountain of cash payments in the near term.”
Rupert Brindley, managing director, Global Pension Solutions and Advisory Group at JP Morgan Asset Management, believes the falls have had mixed consequences for UK pension schemes.
“Global growth concerns are dragging down bond yields in tandem with equities – a dangerous combination,” he says. “ However, the sell-off in FTSE has been amplified by its exposure to commodity producers. UK pension schemes are naturally short of commodities by virtue of the inflation linkage of their liabilities. Underhedged schemes should get some offsetting inflation relief if this decline is long-lasting.”
TAKING DOWN A PEG OR TWO
China’s change of currency peg was seen by many as a move to join the global currency war and export deflation to the rest of the world, as well as a necessary for potential inclusion of the yuan in the International Monetary Fund’s (IMF’s) Special Drawing Rights (SDR) currency basket – an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. Others believe it was consistent with China’s weak export growth, sluggish domestic demand and persistent deflation.
As NN Investment Partners senior portfolio manager, emerging market and Asian debt – local currency and local bonds Peter Sengelmann says, in comparison to other historical global currency devaluations, the yuan’s 1.9% move against the dollar looks “paltry”.
“When Argentina abandoned its peg to the US dollar in 2001, the peso dropped 40% in a day. Switzerland’s move to scrap the Swiss franc’s cap with the euro in January this year caused its currency to rise by than 19%,” he says.
Sengelmann observes markets reacted dramatically with analysts saying the devaluation was a move to boost exports because China was losing control of its economy.
“The fear is that the yuan is set on a downward spiral,” he says.
However, Aon Hewitt head of asset allocation Tapan Datta believes the situation with China’s currency should be put in a global perspective, especially as central banks, particularly in the western world, have been experimenting with monetary policy for a number of years now.
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