Asian equities are at a crossroads. Investors are sitting on the fence asking the difficult question: after months of rocketing growth, high levels of inflation and a credit boom, will Asian stocks have a soft or hard landing?

As may be expected, Rupert Foster, manager of the Matrix Asia UCITS Fund, is in the "soft" camp. UK-listed Matrix recently doubled its Asian assets under management to some $90 million, it announced in May.

Because of soaring food prices, Chinese inflation has been higher and more persistent than expected, reaching 6.4 per cent in June. However, Foster points out that the pressures, apart from the high pork price, are now beginning to wane. He also highlights that higher oil prices have very little impact on the country’s inflation.

“Assuming the government can control the various factors impacting the recent dramatic pork price rises, this autumn we should start to see pork prices falling which will result in CPI finally retreating from recent highs,” he says. “This in turn will allow the government to relax their monetary tightening policy and loosening should start by the autumn, with the preferred method likely to be a relaxation of the annual loan quota.”

The property market in China is undeniably slowing, especially in Beijing and Shanghai, with volumes and prices dwindling. Western media usually focuses on the so-called “tier one” cities, as that is where most of their foreign correspondents live, says Foster. 

He argues that basing predictions on these cities is flawed as their property prices are naturally well above the national average. And as investors make up a larger chunk of the markets, the supply and demand dynamics have historically been more volatile in the “tier one” cities.

“The tightening of regulations in the property market has had an effect as the authorities hoped, but a rapid slowdown currently looks unlikely,” says Foster. “In addition, the advent of the social housing boom in China will provide a much needed fiscal stimulus to the economy as private property starts to slow.”

On the issue of debt, Foster does not think that the seasoning of loans originated in the credit boom that started in early 2009 will turn into a full-blown crisis. “With negative real interest rates in China, meeting payment schedules is not currently onerous, and payment scheduling can be managed going forward with a high proportion of system credit sitting on policy banks’ balance sheets,” says Foster.  

Finally, accelerating private company capital expenditure levels and store sales go against a hard landing scenario. “If the government in China had over-tightened we would be observing two strong effects in the economy: the demise of corporate confidence and consumer confidence,” says Foster.

Store sales are likely to hold up, as the Chinese government will cut taxes from 1 September which could increase the disposable incomes of the country’s middle class of between 18 per cent and 27 per cent. Additionally, about 50 million people will be lifted out of the tax system altogether.