Will China Mean An Annus Horribilis For HSBC Holdings plc And Standard Chartered PLC In 2016?

China could be a big drag for HSBC Holdings plc (LON: HSBA) and Standard Chartered PLC (LON: STAN) next year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I reckon some of the FTSE 100‘s big banks are looking like big bargains for 2016. But HSBC Holdings (LSE: HSBA) and Standard Chartered (LSE: STAN) aren’t among them. And the reason? In one word, China.

In 2014, around 80% of HSBC’s profits came from Asia and that was mainly Hong Kong, China and economies dependent on them. And at Standard Chartered the figure was similar, again with China and its dependencies making up the bulk. But now? China is in trouble.

A few years ago few of us really understood the extent of the structural problems there. I know I certainly didn’t, and I thought the government’s growth target of 7% per year for the next few years was reasonable. After all, China was opening itself up to private enterprise and the grip of central control was slowly-but-surely loosening.

But no…

Except it wasn’t. Now that economic reality isn’t going as well as the people in control ordered, they’re tightening their grip again. Once the party leaders were extolling the virtues of the country’s fledgling stock market. But now they’re blaming the free market enterprise leaders for a stock market bust that was inevitable after the failure of state-ordered attempts to keep the surges going.

Guo Guangchang, often spoken of as “China’s Warren Buffett“, was once lauded as a champion of China’s push for wealth. But he’s now seen as one of the chief scapegoats for 2015’s stock market crash and has been facing lengthy police questioning.

The BBC’s China editor Carrie Gracie made the point this week that “no economy has achieved high income status with a closed financial system“. And though China’s centrally-controlled capital allocation and state-sponsored stimulus have been responsible for recent annual growth in excess of that 7% per year, it’s hard to avoid the obvious conclusion that capital can’t be allocated efficiently by such means and that centrally-planned growth is just not sustainable.

And that points to the real drag on China’s economy – its state owned enterprises (SOEs). They’re horribly inefficient behemoths, financed in part by forced loans from the country’s banks, bogged down by unserviceable debt, and unable to compete in a free market environment. But getting rid of them isn’t on the table, as they’re what give Beijing’s rulers the economic control that keeps them in power.

Giving up power?

I can’t see the Chinese government accepting the need to wind down its SOEs any time soon, despite the obvious fact that the move from state ownership to private ownership has stimulated genuine long-term economic growth in every country that has tried it. But until it happens, any long-term 7% annual growth target remains an illusion.

And in the meantime, we really can’t tell how much toxic debt (from both state-directed lending and China’s still-overheated property market) banks like HSBC and Standard Chartered really hold. Right now I wouldn’t touch any company heavily invested in China, and certainly not the banks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »