Sennitt, who manages the five crown-rated Schroder Asian Income fund, says that along with a massive expansion of bank lending, there has been a pick-up in corporates seeking loans from non-financial institutions. The manager has zero exposure to Chinese banks, and warns that although these non-banking "shadow" loans are not yet a cause for concern, they have created another potential headwind.
"Historically, credit in China has been rationed on a quota basis from the government – and that accounted for the majority of lending in the country," he explained.
"When people talk about the shadow banking crisis, they are talking about the lending systems outside the formal state-owned banks that supplement the quotas."
"There are trusted loans where companies take money off their balance sheets and simply lend to other companies."
"Then there are informal loans, which are more like an over-the-counter agreement. These normally involve a large chunk of money that can be deposited into a wealth management product."
"They are alternatives for depositors as they could either put their money in a bank for three months to get 3 per cent interest, or they can go to a wealth manager and are promised a 4 per cent yield. The wealth management firm then lends out that deposit."
"These shadow bank loans have grown very rapidly, but they came from non-existence a few years ago, and the problem is not overwhelming yet."
"But if everybody were to redeem their wealth management loans then it would be an area of real concern and could cause a lot of panic."
Sennitt has run the £300m Schroder Asian Income fund since November 2001.
According to FE Analytics, the fund – which is yielding 3.81 per cent – is a third-quartile performer in the IMA Asia Pacific ex Japan sector over the last decade.
However, it boasts top-quartile performance over one, three and five years.
Over five years the fund is the fifth-best performer in its sector, with returns of 84.5 per cent.
It has considerably outperformed its benchmark – the MSCI Asia Pacific ex Japan index – over that time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Schroder Asian Income has been considerably less volatile than both the sector and its benchmark over that time as well.
Sennitt’s fund has 7.6 per cent of its holdings in China, which is considerably below its benchmark’s 19.6 per cent. The manager says this is largely due to his zero weighting to Chinese banks.
"The fund is very underweight in China, but we are quite broadly overweight in Hong Kong, so we do get some exposure to China."
"The main reason for that is because it is quite difficult to find good ideas in mainland China because most of the companies in that space are regulated by the government."
"There are obviously risks inherent with that and so an area we have zero exposure to is Chinese banks."
"What has been a concern is that in the Chinese economy there was a very rapid expansion of the credit market during the financial crash."
"My concern with the Chinese banks is that there is an increased credit cost risk. The ratio of non-performing loans in China is still quite low at the moment; however the problem is a lot of corporates have taken on a lot of debt."
"As economic data still looks quite soft, the amount of leverage could ultimately put pressure on the banks' cash-flows," he added.
"What is still positive is that there are very low levels of sovereign debt in China. My view is that Chinese banks have looked extremely good recently, but I think they have hit a period of peak profit."
Schroder Asian Income is relatively diverse, with 67 holdings.
Sennitt has upped his exposure to cyclical stocks recently because he feels defensives have now been overbought.
"There has been a bit more of rotation from your typical defensive stocks into more cyclical companies," he said.
"This isn’t because I am a massive growth bull or anything, but because of their relative valuations."
"People are willing to pay up for more stable and robust earnings and stability, but I think valuations have gone a little too far so I am looking towards more cyclical areas of the market," he added.
Schroder Asian Income has a total expense ratio (TER) of 1.7 per cent and requires a minimum investment of £1,000.