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Fidelity’s Dale Nicholls: beware China banks, but don’t expect Armageddon
by Robert St George on Jun 11, 2014 at 11:54
The successor to Anthony Bolton on the £875 million Fidelity China Special Situations trust, Citywire AA-rated Dale Nicholls, has lent his voice to those worried about China’s banks – but stopped short of predicting a systemic meltdown.
Since 2009, shadow banking has surged in China: according to Morgan Stanley, quasi-loans have ballooned at a compound annual growth rate of 43.3% and non-bank loans at 25.2%.
‘It is the overall growth in credit that we need to watch, and I do believe this is going to lead to fairly significant non-performing loan problems,’ Nicholls (pictured) acknowledged. ‘They are probably understated and they are probably going to increase more than people expect.’
Nicholls added that although a lot of these loans did not officially lie on banks’ balance sheets, it would be the banks that ultimately had to assume the credit risk. ‘We need to factor in what’s off balance sheet,’ he said.
He therefore owns no Chinese banks. ‘The premise there is that although on the surface valuations look relatively cheap, we still have a period going forward when we’re going to see non-performing loans rise more significantly than many people are expecting.’
China Special Situations is 15.9% underweight the index in financials, with the bulk of its weighting to the sector through insurers.
However, Nicholls expressed confidence that the bad debt would not prompt a ‘Lehman-style banking crisis’. He noted that China’s 75% cap on loan-to-deposit ratios would provide a substantial buffer.
‘In terms of what defines a crisis, liquidity is key,’ he argued. In previous financial crises, loan defaults forced banks to stop lending into the economy, exacerbating the problems.
Nicholls doubted that that would happen in China, where loan-to-deposit ratios – even allowing for shadow finance – are still around 80%. In Europe and the UK they are above 120%, and in Britain peaked around 160% before the crunch.
And in China further liquidity could also be provided by the government, he remarked.
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