There has been growing concern about the size of bad debts in China, and a spike in interbank lending rates in June was seen as a warning of a potential crisis to come. After a period of poor performance for the Chinese equity markets, the fears have further depressed demand for investments in China, but Bolton (pictured) says there is no chance of a Lehmans-style collapse.
"I think a lot of international observation on this issue is by people who do not understand how China works," he said.
"We had a big spike in the interbank SHIBOR rate in June and some commentators said this is the beginning of a huge financial crisis in China, but that’s extremely unlikely."
"The whole thing was engineered by the PBOC [People’s Bank of China]. This was all about messaging: the PBOC was saying to the banks, particularly the smaller banks, that unless you adhere to the rules we laid down on things like wealth management products, we will make life difficult for you in the future."
"Unfortunately, it coincided with the Fed raising the possibility of easing back on quantitative easing."
"It’s possible the PBOC over-reacted. China has lots of ways of dealing with this problem. The banks are part of the government."
"Last time, they took the bad debts out of the banks and put them in separate financial companies."
"So we won’t end up in a crisis like we saw in the US."
Last month, Bolton announced his decision to retire from Fidelity and hand over the reins of his China trust to Dale Nicholls.
He confirmed that Nicholls was the man he recommended to the board to take over from him. The handover will begin in January and will be completed by April.
Bolton has denied that his decision to retire was influenced by the performance of his fund, although it has been disappointing.
Fidelity China Special Situations has lost 7.78 per cent in share price terms since launch, according to data from FE Analytics, compared with a fall of 0.5 per cent for the MSCI China index it uses as its benchmark.
Performance has been hit by exposure to the small and mid cap sectors, however, and the MSCI China Small Cap index has lost 12.09 per cent over the same time.
Performance of trust vs indices since Apr 2010
Source: FE Analytics
Bolton points out that his relative performance has been better in more recent times, with the trust up 8.95 per cent in share price terms in 2013 compared with a 1.4 per cent fall in the MSCI China index. The MSCI China Small Cap index has made 10.83 per cent.
He says he is convinced that the upcoming period will be much kinder to his fund, which is positioned to benefit from deep structural changes in the Chinese economy.
The nation is moving from an economy built on the manufacturing of cheap goods to be exported, to higher-quality industry and a more domestically focused economy.
Bolton says this is likely to see the construction of the main indices radically change in the coming years, making benchmark-driven investing fraught with risk.
Sector and stock selection will become increasingly important, he claims, and his trust, which is very different in make-up to the index and the majority of funds buying into the country, should prosper.
One of the areas Bolton is most keen to exploit is the country’s booming internet economy.
He points out that the vast infrastructure programmes established by the state have not extended to the smaller cities in China, and consumer spending there is booming over the net.
A greater proportion of consumer spending is carried out online than in the US, the manager says.
"China already has double the number of internet users than America," he said. "More and more are using smartphones – that market grew by 84 per cent last year."
This is why he has built up a large position in Alibaba, a private company that runs a Chinese equivalent of eBay – Taobao – and Amazon – Tmall.
"Nike makes more money out of Tmall than it does from its own website," he said.
The stock is set to be the biggest ever IPO in Hong Kong later this year, and Bolton says that he expects investors to shift their cash from social media giant Tencent – a popular stock with managers and one in which he is underweight – to Alibaba.
Bolton says that consumption as a whole is set to grow significantly as a proportion of GDP and investors need to look for ways to harness this.
He points out that official Chinese consumption is only 36 per cent of GDP, much less than in the developed world – in Britain the figure is 66 per cent – and also other emerging market countries – in Russia it is 49 per cent.
"There’s a strong relation between urbanisation and consumption," he said. "So with urbanisation increases, we would expect consumption to rise."
Investors need to shift into companies riding these trends and out of the state-owned enterprises [SOEs] that dominate the markets, he says.
"Now the government wants to increase competition, so there will be a tougher time for SOEs. They are talking about private funding for the railways in the latest funding programme."
"A number of SOEs, people would be questioning if they are solvent in the West."
Bolton says that while there are risks involved with investing in China, and the issues in the financial crisis are among them, the current level of valuations and of depressed investor sentiment makes it a good time to buy in.
"Recent fund-flows data show near-record outflows, and in my view you should use this as a contrarian indicator."
"Nobody likes China. People are taking money out of China, which normally means it’s a good time to invest."
Fidelity China Special Sits is currently on a discount of 7 per cent and has ongoing charges of 1.7 per cent, with a performance fee that as of yet has never been implemented.
