Marks Says Governments Shouldn't Boost Markets as China Steps In

  • It's easier to find attractive positions in China A shares
  • China may see occasional recessions and "substantial default"

Governments shouldn’t intervene to support securities prices, Oaktree Capital Group LLC co-founder Howard Marks said, commenting on China’s actions to arrest a stock market rout this year.

Investors tend to shy away from markets when they suspect prices would fall should government support be removed, Marks said to reporters in Hong Kong on Thursday. Such measures also won’t work over the long term, he added.

“China is clearly, at the minimum, ambivalent between free markets and a controlled economy,” he said. "The one thing I feel strongly about is that governments should not try to influence their markets. It’s only healthy when investors believe markets will have ups and downs."

China’s benchmark Shanghai Composite Index fell more than 30 percent since a June peak amid concerns about a slowing economy and as excessive borrowing in the stock market unwound. The decline has yielded some some attractive opportunities to invest in Chinese stocks, Marks said. While China will continue to see faster economic growth than the rest of the world even with the slowdown, there may be occasional recessions, Marks said. He also expects to see "substantial defaults" in China.

‘Malicious’ Sellers

Since the market crash, the government created an agency to support stocks. It has probed and even detained so-called “malicious” short sellers, securities industry executives, one of the country’s top hedge fund managers and a journalist from business magazine Caijing whose report was alleged to have caused investor panic. Authorities have said they want to “purify” the market.

While the Chinese government is justified in pursuing manipulators and U.S. regulators had also suspended naked short-selling of financial firms at the height of the 2008 global financial crisis, Marks said it is "not a great idea" to jail journalists who write negative articles.

“As an investor, I don’t want anything where I suspect the price is higher than what it would be if it’s let alone,” he added.

The sharp declines in yuan-denominated class-A shares have made it easier to find attractive positions in the market, Marks said. Oaktree has a growing involvement in listed emerging-market equities, with China well-represented in such investments, including A-shares, he said. Yet he cautioned the cheaper valuation of A shares are relative, given the market had risen more than 150 percent before the recent rout.

Oaktree is a minority investor in China Cinda Asset Management Co., one of the nation’s four asset-management companies tasked with cleaning up bad debt from the system. Los Angeles-based Oaktree dedicates more than a quarter of its $100 billion assets to distressed-debt investing.

Oaktree has invested more than $5 billion in Greater China to date, including its first investment in non-performing loans in May this year, the firm said. Marks on Oct. 28 described China as a "teenager" with the possibility of its best years ahead.