Nikko AM said the lack of transparency and complexity of the system means even well-informed global investors are unable to determine the exact nature of China’s financial difficulties.
Nikko AM’s research shows while defaults on property trusts have been worked out with rising land prices and generous credit, defaults in the mining and industrial sectors are likely to have more serious repercussions.
Nikko AM chief global strategist John F. Vail said local governments have less capacity to offer rescues due to their own funding issues and as result he expects many more defaults to occur this year.
“Meanwhile, other efforts to increase regulation of the shadow banking sector are bound to reduce liquidity, especially to troubled borrowers, and this has some possibility of accelerating into a more serious credit crunch,” said Mr Vail.
“Thus, we have long been cautious on Chinese equities and despite low valuations, we continue to believe that corporate profit margins will be under pressure and that bank earnings will be under pressure and that bank earnings understate the true problem of bad debts.”
Nikko AM research also indicates the iron ore price will decline by around $20 from the current price of around $130 per ton down to $110 to $120 per ton by 2018, resulting from the increased supply from Australia and Brazil.
“Thus, the outlook for steel makers has begun to brighten with the potential for margin expansion and improved financial performance over the longer term,” said James Eginton, a research analyst at Nikko AM’s subsidiary, Tyndall AM in Australia.
In Japan, inflation is strongly rising with a 0.8 per cent increase from November to December or 3.3 per cent over the past year.
Nikko AM’s research also shows this is flowing through to retail prices with the goods portion of the consumer price index rising 0.7 per cent month-on-month in November and up 5.4 per cent in the past six months.
The latest data from the Bank of Japan shows that $805 billion of household financial new worth was created in the 12 months leading to September 2013.
Nikko AM believes the impact of more wealth on consumption is important for the success of Abenomics.
