The fund manager told What Investment that the Chinese government are targeting GDP growth of 6 to 6.5 per cent, which he believes is ‘unsustainable’ for a country that is now a ‘middle income nation.
Syme remarked that this growth is being pursued through increasing the debt to GDP level, which has now risen to 250 per cent. Synme remarked that ‘over the medium term’ this will lead to a crisis, with the currency likely to fall sharply in value, and economic growth to shutter to a halt.
He noted that the Chinese government are already taking stark action to stop the currency falling, with dollar reserves at the country’s central bank having fallen from $4 trillion in 2014 to below $3 trillion today.
This is happening because the central bank is selling dollars and buying its own currency to push the value of the latter up against the former.
But such a situation cannot persist forever, forcing the government to either allow the growth rate to fall and the currency to rise, or devalue the currency to the point where imports become more expensive but a higher share of global exports is pursued. The latter scenario would deliver a ‘deflation shock’ around the globe. The fund manager takes the view that when the crisis does hit, ‘it will be a massive buying opportunity. China’s long-term path will be like that of Japan, with a lot of growth to come. The crisis will mean that the Chinese currency falls faster than policy makers want, but the Chinese government can buy Renminbi to sort that out.’
Syme doesn’t see any of this playing out within the next two years and has been investing in consumer goods and property companies. He commented that in China a large swathe of house purchases are carried out with cash, not bank debt, which means that the property market can be relatively insulated from a banking or debt crisis.
Away from China, Syme sees value in Korea, India and Taiwan.
Of Korea and Taiwan he commented that rising global growth benefits those economies, while he favours India because ‘as an economy it is not that exposed to the rest of the world, it doesn’t need global demand, there is a lot of domestic demand. The government there are also doing a lot of positive things.’
The JO Hambro Global Emerging Markets Opportunities fund has returned 46 per cent over the past three years.