Shared Thinking Q&A
Here’s Why We See Opportunities for Investors in China
Merian Global Investors
Merian China Equity Fund,
Ping An Asset Management (Hong Kong)
MGI’s Oliver Lee and Ping An’s Vincent Che discuss why quality is more important than quantity when it comes to China’s GDP growth, why they’re optimistic about the consumer and health care space and the significance of the country’s more open capital markets. The Merian China Equity Fund is managed by Ping An Asset Management (Hong Kong).
Question: The economy in China has slowed, what’s the outlook?
Answer: China’s current growth headwinds originate from internal and external factors. Both the crackdown on the shadow banking sector and a drop in productivity efficiency had an impact on growth last year. We believe China will be successful in aiming to keep credit growth steady and in implementing various reforms to boost productivity. Externally, the last 18 months have been all about the trade war, and we believe China will be able to adjust certain polices to counter the impact, thus providing a safety net for the economy. Longer term, China’s important goal of shifting focus from quantity-of-growth to quality-of-growth remains on track as they support the transition of the economy towards services and consumption.
What about the trade war and future US relations?
Answer: The trade war is likely to persist and even though there might be a temporary truce or partial deal, the dispute over technology will unlikely be solved in the short term. Any successful ‘mini deals’ will be a positive for investor sentiment and supportive of Chinese equities. As a response to the broader trade rhetoric, global supply chains will potentially see major changes over coming years, on both manufacturing and technological fronts, and we believe Chinese businesses are already expediting the domestication of key supply chains.
Is there a chance we’ll see the forced de-listing of Chinese stocks from US exchanges?
Answer: Of the possible capital controls mooted a few weeks ago, de-listings are the least likely to happen given the huge investments involved (both passive and active). Other potential measures such as restrictions on US government pensions plans investing in Chinese securities are probably easier to implement. However at this stage we believe the US is purely using these ideas as bargaining chips in the wider trade discussions.
China has introduced a series of stimulus measures for the economy. Do you expect further support?
Answer: The authorities need to boost overall credit demand as a priority and we’ll probably see measures announced over the coming six months to aid that (for example, the relaxation of local government bond quotas). Longer term reforms such as restructuring SOEs (state-owned enterprises) in order to better reallocate resources remain on track and are a healthy development for equity investors.
Should investors be concerned about indebtedness of China?
Answer: Although debt-to-GDP levels have risen quickly over the last decade, we believe the situation is under control given that the majority of the debts are asset backed and at SOE level. We therefore do not see any systematic risk at this stage. That said, rising debt levels have resulted in a decline on marginal return of capital as well as rising NPLs (non-performing loans), and we therefore don’t believe China will be implementing aggressive monetary policy any time soon.
What is the future trajectory of the property sector?
Answer: President Xi Jinping has made it clear in recent speeches that property should be for living in and not for speculation. Given the sector is very policy driven, we think the outlook is therefore quite stable and investors shouldn’t expect material loosening in the near term.
What about the political situation in Hong Kong?
Answer: We do not see the recent turmoil turning into a long-term, protracted event. So although the immediate effect on things like retail sales has been substantial and led to significant share price weakness in certain sectors, we believe this is just temporary. Additionally, the overall impact to China’s economy is limited given the small relative size of the Hong Kong economy.
Will China continue to open up its capital markets?
Answer: The short answer is yes. This reform initiative will bring in more competition to the market and should ultimately boost China’s productivity efficiency. Owning just 3% of the total domestic bond and equity issuance, international investors are significantly underweight given the sheer size, scale and opportunity of the Chinese economy.
Finally, your longer term view. Where will China be in 10 years?
Answer: It’s a huge economy that will continue to grow. What is most important is the quality of economic growth rather than just the quantity. With an aging population and in order to avoid the middle income trap, the Chinese are correctly focusing on increasing productivity and building more of a consumption- and services-orientated economy.
We think there will be plenty of opportunities in the consumer and healthcare space over the coming years. The equity market is only going to become more important for international investors