Loyal fans of the Capitalist Roader Fund need not worry at the recent lack of news. The fund has not gone anywhere. Of course, the market has. We cashed out in February, convinced that the SCI and Anhui Conch Cement (600585) couldn’t sustain their positions, which were 2,300 points and RMB32.90 respectively, as the market was moving from reasonable bounce territory into the low end of irrational exuberance. Since then, however, the SCI has floated on up to about 2,600 points and Conch briefly hit RMB44 before settling slightly.
At a CER Breakfast event this morning, Royal Bank of Scotland Chief China Economist Ben Simpfendorfer drew a distinction between quantity and quality of growth. This has been an ongoing theme of 2009, and one which has been brought to the fore particularly because of the huge rise in first-quarter bank lending. Beijing has said that 8% growth is necessary to absorb the increasing size of the labor force. Simpfendorfer suggested that higher quality growth, with a specific focus on the service sector, could do the same thing at a lower rate of growth – and deliver greater sustainably, too.
And yet, sustainability does not seem to be entering into the equation. Despite some gurgles of discomfort, the People’s Bank of China is pushing ahead with a loose monetary policy, apparently hoping that increased liquidity will keep things moving along until the economy picks up where it left off. Maybe. But given the central bank’s own concerns that smaller private businesses aren’t benefiting much from the huge increase in loans, combined with the specter of non-performing loans (not all of which we’ll hear about immediately, thanks to the banks’ tendency to roll them over), the policy could easily exacerbate structural problems down the road.
How does this affect the fund?
In a way it’s another sign that we shouldn’t have sold Conch when we did. China’s largest cement producer is not the kind of small or medium-sized enterprise that has been having such difficulty securing loans. Taking a broader view, though, we still think it was the right thing to do. Behind the sunshiney headline numbers – the SCI is up 42.66% this year – the dark clouds of gloom have not yet been blown away.
The Capitalist Roader Fund is down 33% since June 3, 2008. The SCI is down 24.4%.