Evercore Pan Asset

There are plenty of bears circling China. For much of the past year there have been stories doing the rounds claiming that China is in a bubble, that China will have a hard landing, that China has run out of growth. We think this gloom has been overdone.
 
Once again this year much of the west bought Christmas from China. It came in boxes and containers half way around the world. Their selling ability is such that even some elaborate Christmas cards said “Made in China” on the back. They make many of the crackers and the tree lights, the cards and the toys, the electrical items and the decorations. Elsewhere in Asia they are churning out the clothes that fill our stores. It did not look as if China was out of the game, or as if the west has started hitting back with more domestic product.
 
It is true there are problems in China. Some of their banks have weak balance sheets. Local government has overdone the borrowing. Property prices have been falling, as the government took action to stop speculation and cool prices. The administration has wanted to slow the economy by monetary means. It raised interest rates and cut bank liquidity and credit, to take some heat out of the economy and to reduce price rises. There are occasional protests against the government.  You could say much of the same about the west, where government has borrowed far too much, where there are street protests, and where property prices have been falling. China does not sit under the great cloud of over indebtedness affecting the western investment weather.
 
I find it difficult to accept that this all adds up to an unsustainable bubble. Chinese shares are selling on 8 times earnings, hardly bubble territory. Property prices are well off the peak levels. Their property boom was not built on the same degree of mortgage leverage as the property booms in the US, UK, Spain and Ireland. Whilst local authority debts are high, total state debt is nothing like the problem that faces the US and leading European countries. The Chinese current account and foreign exchange reserves remain very strong.
 
It is likely that the next few months figures will disappoint, as we see the full impact of the slowdown engineered by the monetary tightening. However, markets usually look further ahead. The Chinese authorities, unlike the west, have a full armoury of weapons to expand their economy more quickly. They can cut interest rates. They can expand bank balance sheets. They can increase public spending. The Chinese state has the means to bail out local government and weak banks should more need arise.
 
The bears are usually people who have little or no investment in China. They also often concede that a hard landing still leaves us with at least 4% growth in China next year.
That argues to us that there is something to go for in Chinese equity. One day overseas investors will want to be more strongly represented in one of the world’s fastest growing major economies. The Chinese success story is not yet over. The irrational exuberance in property is not yet at a level which is a game changer. We think 2012 is the year when Chinese shares could become better appreciated. The last decade has seen great performance from them. The last year has seen poor performance. We regard that as a buying opportunity.
 
We wish you a successful and prosperous 2012.