Denmark’s biggest commercial pension fund PFA is remaining underweight in emerging market equities due to of the continuing uncertainty surrounding Chinese economic growth.

Henrik Henriksen, chief strategist of PFA Pension, said China would be the key risk facing investors over the medium-term.

“The biggest risk for the global economy in the next three to five years, is a hard landing in the Chinese economy,” he said.

Since the financial crisis there had been a hefty increase in debt in the Chinese economy, he added.

“If China were a traditional market economy, the risk of a financial crisis with a big fall on the housing market and in investments would be imminent,” Henriksen said.

For the time being China’s leaders had managed to keep the crisis at bay, he said, but despite this, investors probably had to adjust to a gradual slowdown in China in the coming years.

“Chinese growth indicators are at a lower level than before and so we expect that growth in China will drop in the next few years,” he said.

“This is one of the reasons we are underweighting emerging markets shares in our portfolios,” Henriksen said.

He said PFA had been underweight in emerging markets equities for a long time.

PFA Pension, which has total investment assets of DKK400bn (€53.6bn) has DKK2.7bn invested in Chinese assets, primarily through Hong Kong, with DKK2.5bn of this in equities and DKK200m in bonds.

The pension fund invests in China primarily through external managers and does not have an QFII License to invest directly in Chinese financial markets.

After a year of strong price rises for Chinese equities, shares fell significantly in June and July of this year, and the Chinese authorities had taken a number of different steps to try to halt this slide, Henriksen said.

Interest rates and banks’ reserve requirements have been cut several times over the last year, and the authorities in July also intervened to stop trade in some shares and prevent large shareholders from selling their stock.

Last week, the People’s Bank of China also devalued the renminbi to bolster Chinese competitiveness, Henriksen noted.

Although the Chinese leadership had demonstrated once again that it was ready to use all means to prevent an economic hard landing, the question was whether this could continue, he said.

“The Communist party has a monopoly on political power in China, but that monopoly could be threatened the day China is hit by a serious economic crash,” Henriksen said.

Meanwhile London-based investment advisers CrossBorder Capital, commented that while China’s decision to devalue currency may look like a small token move, the parallel acknowledgement that the rate would in future be more determined by market forces was significant.

“It surely acknowledges what many of us have feared that world markets are in a currency war,” it said.

However, Jan Dehn, head of research at investment manager Ashmore dismissed the argument that China had joined the global currency war and would export deflation to the rest of the world. 

Instead, China was pursuing a far more constructive, rational and forward-looking strategy, Dehn said.

“This strategy involves, amongst other things, achieving global reserve currency status in the near-term.”

Dehn said: “For this reason, China has absolutely no interest in abusing its own currency via competitive devaluations.”

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