Tulloch: China will struggle to avert slowdown

First State’s star fund manager Angus Tulloch has warned the Chinese authorities will struggle to stop the country’s GDP contracting as the repercussions from stimulus measures come home to roost.

Tulloch, who heads up the group's top performing £5.7bn Asia Pacific Leaders fund, said China will find it difficult to keep GDP running at its current level of 9.1% in years to come, as the economy faces the fallout from the credit binge over the last three years.

"We remain somewhat sceptical that the Chinese government can continue to smooth the economic cycle over the longer haul," Tulloch said.

"The credit stimulus provided by China's monetary authority in 2008 has undoubtedly led to some unwelcome side-effects in the allocation of too much credit to the property sector and, more recently, too little to small and medium enterprises in the private sector.

"Reversing these excesses, without giving rise to further nasty repercussions, is likely to prove difficult."

Tulloch's comments came as Chinese PMI data showed a decline for the first time in three years.

Yesterday Chinese authorities also moved to ease monetary policy after the country's central bank slashed reserve requirements for all banks by 50 basis points from December 5 as part of a global response to the new credit crunch in markets.

Tulloch said China's competitiveness was also starting to wane as rising wages and inflation hit home.

"There is increasing anecdotal evidence China is beginning to lose its competitiveness in certain areas," said Tulloch.

"With wages in China almost certain to continue to grow at over 10%, and recent currency strength, we suspect this will become a much more topical issue as time goes on. Certainly, margins are going to fall sharply if demand weakens."

His comments came prior to yesterday's announcement that the Chinese central bank has stepped in to loosen monetary policy for the first time in three years.

The People's Bank of China (PBC) slashed reserve requirements for all banks by 50 basis points from December 5.

Tulloch is underweight Chinese equities in his portfolio ahead of an expected pull-back.

In the face of the global sell-off in markets, Tulloch has achieved top decile performance within the IMA Asia Pacific Excluding Japan sector over the past year, losing 1.1% compared to the sector average decline of 11.7%, according to Morningstar.

Over five years the fund is also top decile, returning 89.2% and beating the peer group average return of 48.8%.