Henry McVey, Head of Global Macro and Asset Allocation at KKR, provides a fascinating insight into the structural shifts occurring in China across the economic, political and social spectra of the region. Please follow this link for a detailed analysis and review of the potential opportunities and inevitable challenges that face the discerning investor as KKR's McVey reports on some of the highlights of his recent visit to China.
The services sector has now become the largest part of the Chinese economy, outpacing manufacturing and construction for the first time.
What are the implications for investors? China still faces a number of significant hurdles that investors need to consider. For example, even with higher leverage ratios, return on equity is now lower in China than it was in 2011. Meanwhile, corporate balance sheets are now more unproductive as evidenced by decreasing asset turnover.
China has also suffered negative Producer Price Inflation (PPI) for the past 36 months and low Consumer Price Inflation (CPI), which have resulted in an increase in real interest rates, raising the cost of capital and restricting liquidity in the process. As a result, McVey anticipates further interest rate cuts in 2015.
McVey concludes with a recommendation that equity investors should allocate capital towards areas that represent growth, including environmental remediation, healthcare services, robotics and logistics: "High yielding companies with even modest growth should also do well in an environment of low inflation and more liquidity".