China bank stocks seen as way to go despite bad debt fears

PUBLISHED : Thursday, 05 January, 2012, 12:00am
UPDATED : Thursday, 05 January, 2012, 12:00am


Investors are being advised to keep believing in the China story and overweight mainland bank and consumption stocks despite fears that global economic turmoil and an unfolding bad-debt crisis at home will stunt growth.

Howard Wang, head of the Greater China Team of JP Morgan Asset Management, said the company had increased its exposure to mainland banking stocks despite market concerns about non-performing bank loans.

'The non-performing loan balance has been falling and the loan loss reserve coverage is ample,' he said.

Wang also said the firm would maintain its overweight position in mainland consumption stocks, but would underweight Hong Kong property stocks and financials.

'Property prices will fall as expected,' Wang said, referring to the market prediction of a 10 per cent drop in home prices this year.

He also said rents might come down as financial institutions reduced headcounts in Hong Kong.

Fund houses would continue to feel the pressure to redeem and log in profits this year, Wang said.

JP Morgan Asset Management plans to mainly invest in growth stocks on the mainland instead of high-dividend ones, in line with the international perception of mainland stocks as a risky asset class.

Separately, Standard Chartered Bank warned of possible recession and predicted turbulence in Hong Kong's equity market in the first quarter.

It said an expected downgrade of France's credit rating in coming weeks might send shockwaves through other AAA-rated sovereign economies such as Germany.

Nicholas Kwan, the bank's head of research, East, said some of the 17 euro-zone members might be forced to drop out of the currency union, but said he did not expect this to happen anytime soon.

In China, the bank expects authorities to wind down the reserve requirement ratio (RRR) by 50 basis points in the next two weeks.

Kelvin Lau, the bank's senior economist for Asia global research, said there might be four to five more reserve ratio cuts this year as mainland inflation continued to slow.

Economists have predicted that a slowdown in mainland growth will free the government to ease the tight monetary policy sooner rather than later.

'More RRR cuts, as frequent as one per month in the first half, will be necessary to reduce the risk of a hard landing for the economy,' Jianguang Shen, chief Asia economist with Mizuho Securities, wrote in his 2012 economic outlook last month.

The country's top political leaders, including Hu Jintao and Wen Jiabao, both of whom will step down at the 18th party conference, have repeatedly warned of risks and emphasised the need for pre-emptive and timely policy fine-tuning based on changing situations.

Economists expect monetary loosening and pro-growth measures in China's macro policy for most of next year.

Many, including government think tanks, have forecast China will see a downturn this year largely due to weakening exports.