Investing in China
Frederick Jiang, CFA
Ways to Play China
ADRs
Local Shares in Hong Kong
Index ETF
Mutual Funds (Asia, China, Emerging Market)
Multi-National Companies with Big China Exposure
Not for Faint Heart
Volatility Can be Very High in Down Turn
Less Transparency and Different Accouting
Stick to Mid to Large Cap Names
Be Patient
High Return, High Volatility
Consistent Earnings Growth
Hang Seng China Enterprises Index - EPS
Buy Low, Sell High
Hang Seng China Index – Price/Earnings Multiple
Opinions Diverged
China will overtake the U.S. to
become the world’s largest economy.
---- Jim O’Neil, Goldman Sachs
Opinions Diverged
The real estate bubble in China, looks
like Dubai times 1000 – or worse.
---- Jim Chanos
Looking Back – GDP in US$
CAGR 2.9%
CAGR 10.2%
Looking Back – Stock Market
What drives China’s Growth?
•
•
•
•
•
Reform and Restructuring
Urbanization and Industrialization
Demography Dividend and Education
Savings and Capital Formation
Globalization
Reform and Restructuring
From Communist to Socialist with Chinese Characteristics
From Central Planning to Market Driven Economy
From Closed-Door policy to Open-Door Policy
From Dictatorship to “Centralized Democratic” Decision Making
Privatization
What Drives China’s Growth?
•
•
•
•
•
Reform and Restructuring
Urbanization and Industrialization
Demography Dividend and Education
Savings and Capital Formation
Globalization
What Drive China’s Growth?
Urbanization
-- 1.5 million per month
Industrialization
-- Raise productivity
-- Monetize economic
activities
Urban / Total Population
(%)
2000
2005
2010
2015
2020
2025
2030
Australia
87.2
88.2
89.1
89.9
90.6
91.3
91.9
China
35.8
40.4
44.9
49.2
53.2
56.9
60.3
Hong Kong
100
100
100
100
100
100
100
India
27.7
28.7
30.1
31.9
34.3
37.2
40.6
Indonesia
42.0
48.1
53.7
58.5
62.6
65.9
68.9
Japan
65.2
66.0
66.8
68.0
69.4
71.1
73
Korea
79.6
80.8
81.9
83.1
84.2
85.2
86.3
Malaysia
62.0
67.6
72.2
75.7
78.5
80.5
82.2
Pakistan
33.2
34.9
37.0
39.7
42.8
46.3
49.8
Philippines
58.5
62.7
66.4
69.6
72.3
74.6
76.7
Singapore
100
100
100
100
100
100
100
Thailand
31.1
32.3
34.0
36.2
38.9
42.2
45.8
Vietnam
24.3
26.4
28.8
31.6
34.7
38.1
41.8
Asia
37.1
39.7
42.5
45.3
48.1
51.1
54.1
US
79.1
80.8
82.3
83.7
84.9
86.0
87.0
Latin America
75.3
77.5
79.4
80.9
82.3
83.5
84.6
Western Europe
75.3
76.1
77.0
78.0
79.1
80.4
81.7
Source: United Nations, CLSA Asia-Pacific Markets
What Drives China’s Growth?
•
•
•
•
•
Reform and Restructuring
Urbanization and Industrialization
Demography Dividend and Education
Savings and Capital Formation
Globalization
Demography and Education
Demography Dividend
College Enrollment
mn
7.0
6.0
5.0
2.0
1.0
New ly enrolled
Fresh graduates
2010
2007
2004
2001
1998
1995
1992
1989
1986
0.0
1983
With money, Will spend
3.0
1980
Young and Educated
4.0
1977
China’s Baby-boomer
Generation
Brain power: US vs China
35,000
Science and engineering PhDs
(No.)
USA
30,000
China
25,000
20,000
15,000
10,000
5,000
0
1999
2000
2001
2002
2003
2004
2005
Source: National Science Foundation, China National Bureau of Statistics, CLSA Asia-Pacific Markets
2006
2007
What Drives China’s Growth?
•
•
•
•
•
Reform and Restructuring
Urbanization and Industrialization
Demography Dividend and Education
Savings and Capital Formation
Globalization
Saving is Virtue!
Total Household Deposit in China
US$5.13 Trillion
Total Deposit
Waiting to make deposit
Household Savings / Disposable Income
China
Singapore
Hong Kong
India
Higher Savings Ratio,
Malaysia
South Korea
Higher Capital Formation,
Indonesia
Thailand
Higher Growth Rate
Australia
Taiwan
Japan
Philippines
(%)
USA
0
10
20
Source: Euromonitor, CLSA Asia-Pacific Markets
30
40
What Drives China’s Growth?
•
•
•
•
•
Reform and Restructuring
Urbanization and Industrialization
Demography Dividend and Education
Savings and Capital Formation
Globalization
Globalization
China Accounts for 10% of Global Trade
Drivers for the Growth in Next Decade?
• Reform and Restructuring should continue,
but no more low hanging fruits
• Urbanization and Industrialization
another two decades to go
• Demography Dividend and Education
no more labor growth, productivity to go higher
• Savings and Capital Formation
need less savings to drive domestic consumption
• Globalization
slower export growth, trade balance
GDP grow th
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
No More Double Digit Growth
%
16
14
12
10
8
6
4
2
0
Power of Compounding
GDP Comparison
30000
US$ Billion
25000
20000
China
15000
US
India
10000
5000
0
Year
Key Assumption
China
India
U.S.
Real GDP
7%
6%
2%
Inflation
3%
4%
2%
Currency Appreciation
2%
1%
Myth 1: Massive Real Estate Bubble
• “A reported 64 million empty apartments
in China’s Ghost Towns” – Financial
Times Blog
• “30 billion sf of office under construction,
a 5-foot by 5-foot cubicle for every
Chinese” – Jim Chanos
• “It costs you $1 million to buy an
apartment in Beijing or Shanghai”
“Housing Bubble” in China
Empty Complex
Supply and Demand in Last 10 Years
(in millions)
“Housing Bubble” in China
sqm, mn
700
sqm per person
45
40
600
35
500
30
400
25
300
20
15
200
10
100
5
New homes (floor space, LHS)
Source: National Statistic Bureau
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
1995
0
New homes/new urban population (RHS)
“Office Bubble” in China
Myth: “30 billion square feet of office under-construction”
Facts: 18 billion square feet all together, residential, office, commercial.
square meter, mn
140
120
100
80
60
40
20
0
1995
1998
2001
2004
under Construction: Office
2007
2010
Completed: Office
Facts: office under-construction is 1.3 billion square feet,
not 30 billion.
“Housing Price Bubble” in China
thousand RMB per sqm
30
National
25
Beijing
Shanghai
20
15
10
5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
Source: Merrill Lynch Economic Research
Myth: $1 million apartment in Shanghai and Beijing
Fact: Average price is 300K-400K in BJ and SH, and nation wide
average price is less than $80,000 in urban area.
Chinese Cities are Quite “Small”
% of city population to national population
25.0
20.0
15.0
10.0
5.0
0.0
Beijing Shanghai
New
York
City
Toky o
Mex ico Moscow Bangkok London
City
Seoul
Another Angle: Mortgage Loan Size
Mortgage to GDP: China 15%, US 82%
%
25.0
20.0
15.0
10.0
5.0
0.0
2002
2003
2004
2005
Mortgage loan to GDP
2006
2007
2008
2009
Mortgage loan to total household bank deposits
Source: Merrill Lynch Economic Research
2010
Myth 2: China is Export Driven
%
40
30
20
10
Ratio of ex ports to GDP
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Gross Export vs. Net Value-Added
Average Selling Price $400
Ex-Factory Cost: $200
(reported in China’s export)
Value added in China: $6
(reported in GDP)
True Export Share
Source: UBS Economic Research and Waddell & Reed Estimate
GDP Composition
Share of GDP 2010
13%
42%
Export
Consumption
Fixed-asset investment
45%
Source: Waddell & Reed Estimate
Myth 3: China is Investing Too Much
Chinese Consumption as % of World Total - 2010
70%
60%
50%
40%
30%
20%
10%
0%
Sea-bound Iron
Ore
Met Coal
Source: BNP Paribas Research
Copper
Nickel
Zinc
Cement
China’s Capital Stock
Total Length of Railway
KM
250,000
Total Number of Airports
15,000
13,000
200,000
11,000
9,000
150,000
7,000
100,000
5,000
50,000
3,000
1,000
Total Length of Paved Roads
Korea
Japan
India
France
China
UK
Germany
Russia
Brazil
-1,000
US
Korea
UK
Japan
Brazil
France
Germany
India
China
Russia
US
0
Number of Vehicles per 1000 People
KM
7,000,000
900
800
700
6,000,000
600
500
5,000,000
4,000,000
400
300
3,000,000
200
100
2,000,000
1,000,000
India
China
Brazil
Russia
Korea
UK
Germany
Japan
France
Korea
UK
Germany
Russia
France
Japan
Brazil
India
China
US
US
0
0
China
Japan
Korea
US
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
Per Capita Steel Production
Ton
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Capital Formation as % of GDP
Investment % of GDP
46%
45%
44%
43%
42%
41%
40%
2005
Source: CEIC
2006
2007
2008
2009F
Where does the investment go?
Investm ent Breakdow n by Sector
Other Services
11%
Manufacturing/Mining
36%
24%
Property Development
29%
Infrastructure Build-out
Source: China National Bureau of Statistic
What support investment growth?
Gross Saving Ratio
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
2005
Source: CEIC
2006
2007
2008
2009F
Myth 4: China’s Debt Bomb
“As the world watches the Greek credit crisis unfold,
a Sino-debt disaster is brewing halfway around the
world.”
Fortune Magazine, June 2011
Real Picture
Estimated Government Liability and Asset
(% of 2010 GDP)
Assets
Liabilities
Market Value of Listed SOEs
35%
Central Government Debt
17%
Value of Other SOE Assets
15%
Local Government Debt
27%
Land Use Rights
30%
Legacy Bad Loans
Total Gross Public Debt
Under-funded
Pension/Healthcare
New Social Security
Coverage
Total Saleable Assets
80%
Source: CEIC, UBS and Waddell & Reed Estimates
Total Liabilities
7%
51%
25%
5%
81%
Public Debt -- U.S. vs China
Public Debt – U.S. vs China
Federal Government
State Government
Local Government
Gross Public Debt
U.S.
93%
7%
11%
111%
China
24% (17%+7%)
10%
17%
51%
Medicare Shortfall
Social Security shortfall
166%
37%
25%
5%
Total Government Liabilities 314%
81%
Note: Chinese data does not include debt owned by State Owned
Enterprises. U.S. data does not include agency bonds.
Private Debt – China vs U.S.
Mortgage to GDP: China 15%, US 82%
Household Debt % of GDP
120%
100%
80%
60%
40%
20%
0%
China
India
Taiwan
Korea
US
UK
Not Without Road Blocks
•
•
•
•
•
•
•
•
•
•
Less Favorable Demography
Structural Inflation
High Environment Protection Cost
Imbalanced Economic Structure
Widening Wealth Gap
Difficulties in Political Reform
Wide-Spread Corruption
Instable Corporate Profit Margin
No Equity Culture
Many More…
Less Favorable Demography
mn
350
300
250
Aging Population
200
150
100
50
1989
1991
1993
1995
1997
Age 0-14
1999
2001
2003
Age 65 and abov e
2005
2007
2009
million person
600
500
Less number of young
workers
400
300
200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Age 20-44
20-39
20-34
Structure Inflation
Food Price Inflation: the side-effect of urbanization
Major driving force behind high CPI inflation
Lack of Natural Resources:
60% of Oil Imported
50% of Iron Ore Imported
60% of Copper Concentrate
30% Soy Bean
5% of Corn
………
High Environmental Cost
Pollutions Cost China as Much as 2-3% of GDP
Imbalanced Economic Structure
U.S.
China
Personal Consumption
70%
34%
Government Spending
19%
21%
Investment
15%
33%
Net Export
-3%
12%
100%
100%
Total
Investment Implication
China Offers Long Term Growth Opportunities
Different Ways to Play China
Not for Faint Heart
Investment Implication
GDP Comparison
30000
US$ Billion
25000
20000
China
15000
US
India
10000
5000
0
Year
Key Assumption
China
India
U.S.
Real GDP
7%
6%
2%
Inflation
3%
4%
2%
Currency Appreciation
2%
1%
$10,000 Growth at Different Rate
30000
25000
20000
Grow at 12%
15000
Grow at 6%
10000
5000
0
1
2
3
4
5
6
7
8
9
10
11
12
Assuming: 1. Chinese EPS grows at nominal GDP rate, US grows
at 1.5X of GDP rate; 2. PE multiple and profit margin Stay the
Same Over 10 Years.
Q&A