Tackling Asia’s challenges
People and money in China are still the focus for asset managers in Asia, in part because they will add to inflationary pressures. Jonathan Boyd reports from the RCM Berlin conference
Undercurrents in China’s labour market affecting the longer-term development of investment opportunities in this key Asian market, and the big play on currency policy that China’s government is making, were among the key issues discussed at RCM’s recent Berlin conference.
Mark Konyn, chief executive officer of RCM Asia Pacific (part of Allianz Global Investors), said his particular challenge was the limited local pool of talented fund managers and other financial services professionals.
The situation on the ground has improved in the two decades he has been based there, but it still lags behind Europe and the US, he said.
Business in China often takes the approach of becoming the leading player regionally, then globally.
This explains why, in the area of financial services, for example, Chinese firms looking to grow their asset management businesses usually set up in Hong Kong, then look to poach people from others, including foreign firms with a local presence.
The factory-based export-led model that has provided China with its rapid growth in the past decade is also facing the ‘people’ issue, according to Christina Chung, head of China equities, RCM Asia Pacific.
The country is facing a long-term decline in its labour force.
Coupled with near-term government initiatives to push the minimum wage sharply higher, this is being felt in strong levels of wage price inflation. The next five-year plan aims to boost the minimum wage by 80%.
In turn, this raises fears of structural rather than cyclical factors becoming the key driver of consumer price inflation.
Higher CPI is a problem when the government is trying to diversify the economy to rely more on domestic consumption rather than exports.
On the issue of money, there are a number of clear trends: one being that the government wants to ‘internationalise’ the renminbi.
Another is the spread of wealth and how this is transforming China. Such trends are tied up in politics and the post-global financial crisis picture of Asian economic strength relative to the West. Although the region was hit hard by the financial crisis, it was also quick to recover.
The sea-change occurred as economies realised they needed to diversify to find other drivers such as domestic consumption, rather than just rely on an export-led model, Konyn said.
The recovery in output has proceeded to the point where it is above pre-crisis levels.
This has made Asian exporters more reliant on intra-regional trade than with still struggling Western markets: for example, Korean car manufacturers now export more to Asia than Europe and the US. This change has also come with currency policy change across much of the region.
China’s long-term objective is to enable free trade in its currency, the renminbi. If that were the case today, China’s weight in the average global portfolio would be 10% against the 3% indices generally give it.
The appreciation of the renminbi against key reserve currencies is not going to happen in the near future, but at some point it will, according to Konyn. Once it does happen, portfolios will have to match the allocation.
The rapid growth in wages throws a spotlight on inflation. In Konyn’s view, moves by the People’s Bank of China, the central bank, to limit access to credit by tightening up its reserve requirement ratio (RRR) on local banks are intended to soak up some of the ‘hot’ money in the economy, rather than stop consumption.
Therefore, lending rates are up, but not in the usual way economists would expect in a high inflationary environment. This is likely, because the bank sees the problem as being cyclical rather than structural.
For example, food prices have been volatile, but this is a result of weather conditions, not wages rising.
Even so, wages are increasing, which should push up domestic consumption, although it is yet to overtake exports as an economic driver.
However, it should be noted that the credit environment is becoming more normal, according to Chung.
This is because the growth in loans to fund large infrastructure projects was coming to an end.
Much of this was pushed as part of the government’s economic stimulus in 2009, leading to some ‘crowding out’ effects. Many of these projects will come to fruition by the second half of 2011.
The RRR is also a proper tool to meet concerns about liquidity in China’s financial system, given the still high levels of money being accumulated through trade.
Higher domestic asset prices are one result, as the accumulation feeds through into the local economy. RCM’s view is that both the RRR and interest rates could go higher this year before easing off.