Platinum’s managing director, Kerr Neilson, stated in the company’s latest quarterly report that China is still going through a transformative change.
“We have recently returned from a trip to the backwoods of China. As always, one is astounded by the scale and energy of the place... As with other credit-induced booms, the mood of the crowd is infectious and can distract one from the main issues,” Mr Neilson said.
The listed investment company believes the main issues and risks are associated with credit.
More specifically, it sees problems in the state-owned enterprises crowding out the private sector and much of the capital being directed on asset values and not cash flows.
However, the biggest concern is around the “shadow banking system”, with the development of unregulated products attempting to circumvent restrictions on credit growth.
Despite these fears, Platinum sees positive developments in tackling these problems.
“The big four [regulated] banks are in relatively good shape, with loan to deposit ratios of 60 to 70 per cent and relatively strong management,” Mr Neilson said. “The new regime is setting in place a wave of changes starting with a clamp-down on improper practices.”
The country is also yet to truly tap into its domestic demand, which should help consumer consumption.
“The consumer with the savings rate still at 40 per cent, and an attitude and desire to enjoy the better things in life, will partially offset the likely contraction from a redirection of activity from infrastructure investment,” Platinum stated.
“We caution readers from becoming too pessimistic about China. It is a highly dynamic economy [and] mass consumption has barely begun.”
In terms of its investment strategy, Platinum is attempting to avoid the overpriced/inflated areas of the economy.
“As far as our investment activity goes, we are tending to favour these emerging themes and giving a wide berth to the traditional and alarmingly oversupplied parts of the economy. A full 4 per cent of our 6 per cent exposure to China is in internet-related entities.”
