(Yicai Global) Oct. 9 -- China needs to reform to increase its supply of quality assets, Shen Minggao, chief economist at GF Securities Co. [SHE:000776], told Yicai Global in an exclusive interview.
Asset-heavy industries face larger risks, while those without the need for major assets, such as new-economy, consumer and services sectors, enjoy greater growth potential, he added.
Shen recommends investors keep an eye on the consumer market and avoid investment-driven industries. Consumption growth in China is stronger than many investors had expected as the younger generation is much more willing to spend than their parents were, he said.
The new economy is another focus area, Shen added. He believes that China’s new economy, including online and green industries, are more vigorous than that of many other countries. Unlike cyclical industries characterized by volatility, these areas are more sustainable and merit more long-term attention and investment.
Liquidity tightening usually starts at small- to medium-sized enterprises, which are at the lower end of the economy, he said, commenting on China’s central bank’s decision to reduce the reserve requirement ratio. Recent environmental protection inspections have made life tough for SMEs with lower standards, and price hikes by upstream firms have weighed on smaller downstream companies. The People’s Bank of China’s latest move aims to pump more liquidity into smaller businesses to provide credit support for the real economy while deleveraging financially, Shen added.
He believes credit growth or the monetary expansion rate will slow down in the future, in what can be regarded as a relatively tight financial cycle. A substantial economic rise is unlikely to occur before deleveraging or supply-side reforms are complete.
China makes up more than 15 percent of the world’s gross domestic product, but yuan assets rarely make up such a large portion of investment portfolios among foreign investors, and represent just 2 or 3 percent at some funds.
Shen expects more investors to inject funds directly into yuan-denominated assets in future, as they enjoy considerable room for growth. The Chinese government may also need to make yuan assets more attractive to help alleviate investors’ concerns about their ability to transfer money out of China freely after investing in the country, while also encouraging capital inflow, he added.