INVESTORS should be cautious about buying cheap shares in China, an Asia investment expert has warned.
Gary Dugan, chief investment officer for Coutts in Asia and the Middle East, said China had lurched into crisis, with falling gross domestic product (GDP) forecasts, expensive credit and no short-term props to growth.
He said: “At the heart of China’s crisis is the determination of the new government to bring much more economic discipline to the system and to rebalance growth away from (wasteful) investment and into consumption.
“However, this is a very delicate task that the economy has few effective levers to deal with.”
He added: “The bulls in the market are hoping that all of the recent turmoil in the financial sector was to an extent planned.
“Their theory is that the authorities are seeking to squeeze credit growth out of the system.
“The sceptics are concerned that the authorities are not in control and may be seeing consequences of their attempts to restrain lending growth that go far beyond what they had anticipated.”
Mr Dugan said earlier efforts to rein in lending to the real-estate sector had largely been ineffective in the regions, outside of Beijing.
“Central policies have not been implemented by regional governments; a reminder that a large part of regional government income comes from property development,” he said.
He added: “Chinese equities continue to look cheap, but we would caution that cheap valuations have never provided a consistently good signal of outperformance or absolute gains from the market.
“Like other major economies, China deployed enormous resources to fight off the impact of the global financial crisis.
“Like all countries, it is now coming to terms with the reality that even prior to 2007 economic growth was on the wane.”
He said: “The maturing of the economy means less employment growth, less productivity growth and fewer structural shifts that can boost GDP growth above a long-term sustainable rate of six per cent to seven per cent.”