China’s big leverage crackdown gets a big shrug from markets

The Chinese leadership has this year made its strongest commitment yet to curb financial risks and rein in spendthrift local officials, yet the campaign has spurred barely a ripple of concern among global investors.

In a recent survey, China hardly registered on the list of dangers eyed by fund managers and strategists that could threaten the “Goldilocks” boom in stocks and credit around the world. That’s a big change from two years ago, when a surprise devaluation of the yuan spooked markets, all the more because it came just weeks after China’s equity bubble had started to burst.

Setting aside the permanent bears on China, what’s also missing nowadays is fears of a hard landing for the US$11 trillion economy. Key to the change has been President Xi Jinping’s need for smooth sailing in the run-up to a critical once-in-five-years Communist Party leadership reshuffle in coming months. Policy makers have delivered the goods, with growth near 7 per cent -- stoking corporate earnings even amid the clampdown on leverage.

“If you look back at the last six, seven years, investors were always concerned about China,” said June Chua, a Hong Kong-based fund manager and head of Asian equities with Harvest Global Investments Ltd. “We’ve always had earnings that were on a constant downgrade. This time, this year, we’ve actually seen an upgrade cycle happening in China.”

Chua said she recently increased the weighting of Chinese shares in the international portfolios she helps manage. Harvest, with US$114 billion in assets under management, is one of the largest Chinese asset managers, though capital controls mean its overseas holdings are mainly for non-mainland China resident clients.

Those same capital controls keeping Chinese money at home also play a part in diminished worries about China, because they’ve helped to stabilise the yuan and calm fears of a continuous depreciation. Partly thanks to the dollar’s broad decline in recent months, the yuan has risen 3.6 per cent this year, after falling for three straight years through 2016.