AFTER THE FALL: Matthews Asia I October 2015

Transcription

1 AFTER THE FALL: The Path Forward for China s Economy and Stock Market Matthews Asia I October 2015 The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of this information. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. The views and information discussed in this presentation are as of the date of presentation, are subject to change and may not reflect the presenter s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, singlecountry and sector strategies may be subject to a higher degree of market risk than diversified strategies because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies. 1

2 Perpetual Forecasts of Doom and Destruction What mistakes have led so many analysts to predict imminent collapse for so many years?

3 A-Shares Down Sharply, but a Crash? SHCOMP down 34% from June 12 peak; but up 5% YTD and up 44% YoY (as of 19 October) Margin trading balance down 57% from peak to US$150BN SHANGHAI COMPOSITE INDEX 6,000 5,000 4,000 3,000 2,000 1,000 MARGIN TRADE (Rmb BN) 2,500 2,000 1,500 1, % 1 8% 6% 4% 2% 0 Aug-13 Mar-14 Sep-14 Mar-15 Oct-15 0 Jan-13 Sep-13 May-14 Jan-15 Oct-15 Outstanding balance of margin trade (LHS) Margin trade outstanding as a share of total market cap as a share of market cap of free float shares as a share of free-float shares market cap defined by Bloomberg Sources: CEIC, Bloomberg 3

4 Chinese Consumers Shrug Off A-share Correction 50m active investors = 7% of urban population 73% of active accounts have less than US$15,000; less than 1% have more than US$1MN As the market rose (March-May 2015), bank deposits increased 1 YoY. Real retail sales rose 10.8% in September same as a year ago. Chinese tourist arrivals in Japan up 133% YoY in August REAL GROWTH RATE OF RETAIL SALES (YEAR-ON-YEAR) 18% 16% 14% 12% 1 8% 6% 4% 2% Jan-10 Oct-10 Aug-11 Jun-12 Apr-13 Jan-14 Nov-14 Sep-15 Source: CEIC 4

5 The World s Best Consumption Story Year-on-Year changes in some consumer categories 133% Chinese visitor arrivals in Japan August 112% Apple s greater China revenue 3Q % Spending by Chinese at tax-free shops in Europe August 59% SUV sales September 56% Express parcel deliveries September 54% Movie box office revenue 2Q Nike sales in Greater China Three months ending August 19% Furniture sales September 14% Gasoline consumption August 11% Household appliance and electronics sales September 11% Inflation-adjusted retail sales September 9% New home sales September 3% Passenger car sales September As of October 19, 2015, accounts managed by Matthews Asia did not hold positions in Apple Inc., or NIKE Inc. Sources: Japan National Tourist Office; Company Data; Global Blue; CEIC; CNBC; National Bureau of Statistics of China 5

6 Chinese Home Buyers Shrug Off A-share Correction New home sales up 18% in June, 21% in July, 16% in August, 9% in Sep vs -12% in Sep 2014 YOY GROWTH RATE OF NEW HOME SALES BY SQUARE METER Jan-10 Dec-10 Nov-11 Nov-12 Oct-13 Sep-14 Sep-15 Source: CEIC 6

7 A Serious Devaluation? The RMB has given back 2% against the U.S. dollar (as of 16 October 2015) RMB/USD Depreciation Jul 24-Jul 31-Jul 7-Aug 14-Aug 21-Aug 28-Aug 4-Sep 11-Sep 18-Sep 25-Sep 2-Oct 9-Oct 16-Oct Source: CEIC 7

8 Devaluation in Context Since July 2005, RMB has appreciated by 3 against USD as of Oct 19 th ; NEER has appreciated by 46%, and REER has appreciated by 57% as of September 2015 PBOC MID PRICE RMB/USD Jan-05 Mar-07 Apr-09 Jun-11 Aug-13 Oct-15 EFFECTIVE EXCHANGE RATE 2010= Jan-05 Feb-07 Apr-09 May-11 Jul-13 Sep-15 Nominal effective exchange rate Real effective exchange rate Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in Source: CEIC 8

9 Devaluation was Not About Export Competitiveness In first six months of 2015, world exports down 10.7% YoY; Germany -12.9%;China s +0.7% Despite strong REER appreciation of the RMB, China s share of world exports rose from 11.6% in 2011 to 14.3% in June From , CAGR of global exports +9%, China exports +18.2% YOY GROWTH RATE OF REAL EFFECTIVE EXCHANGE RATE 2 MARKET SHARE OF WORLD EXPORTS 18% 15% 1 5% -5% -1-15% Jan-06 Mar-09 May-12 Aug-15 16% 14% 12% 1 8% 6% Jan-06 May-07 Sep-08 Feb-10 Jun-11 Oct-12 Mar-14 Jul-15 China Germany China Germany Source: CEIC, WTO 9

10 China has Been the U.S. Fastest Growing Export Market... by Far Growth rate of U.S. exports to its 10 biggest market, since China joined the WTO in 2001 Brazil 177% Canada 74% Mexico 116% China 666% Japan 3% Germany 68% UK 3 Netherlands 10 HK 18 S.Korea 6 Total US exports minus China 97% Source: CEIC 10

11 Not Deleveraging, but Steadily Slower Credit Growth YoY 4 35% 3 25% 2 15% 1 5% Q15 Outstanding TSF Rmb loans outstanding Nominal GDP M2 TSF=Total Social Finance, or aggregate credit. Sources: CEIC, People s Bank of China 11

12 The Party s Top 5 Mistakes Putting the Party above the law Lack of trusted institutions, and inhibiting the development of civil society Blocking freedom of expression and political dissent Slow to fix China s environmental disaster Overly aggressive approach to neighbors in the South and East China seas 12

13 Mistake 1: Underestimating the Dominant Role of the Private Sector Millions State-controlled urban employment Private urban employment Source: CEIC Data 13

14 Not Surprisingly, Private More Profitable Profits for privately-owned industrials were up 13% YoY in August, the eighth consecutive month of profit growth In contrast, state-owned enterprise (SOE) industrial profits were down 44% in August, the 13 th consecutive month of declining profitability Privately-owned industrial firms now account for 35% of total profits of larger industrial firms, up from a 12% share a decade ago YoY Jan-12 Sep-12 Jun-13 Feb-14 Nov-14 Aug-15 Profits by SOEs Profits by private firms Source: CEIC, MICM estimates 14

15 Most Bank Loans Now to Private Firms STOCK OF BANK LOANS Share 5 4 Private Sector 3 State-Owned Enterprises 2 Consumer and Mortgage Loans 1 Government and Public Institutions Sources: People s Bank of China, CEIC, MICM estimates 15

16 Mistake 2: Not Recognizing that Rebalancing is Well Underway Percentage Points % 14% 12% 1 8% 6% 4% 2% Final Consumption Gross Capital Formation Net Exports of Goods and Services GDP Growth Rate, YoY (RHS) *Estimates Source: CEIC, MICM estimates 16

17 Services Now More Important than Manufacturing and Construction SHARE OF GDP BY PRODUCTION APPROACH Share of GDP Q15 Primary industry refers to agriculture, forestry, animal husbandry and fishery and services in support of these industries Secondary industry refers to mining and quarrying, manufacturing, production and supply of electricity, water and gas, and construction Tertiary industry refers to all other economic activities not included in the primary or secondary industries, including real estate, finance, wholesale and retail, transportation and other service industries Source: CEIC 17

18 Mistake 3: Underestimating Chinese Consumers Real compound annual growth rate of final consumption from 2009 to 2014 China 8.7% Germany 1.1% United Kingdom 1. India 7.2% Japan 1.3% Korea, Rep. 2.7% HK 5. Thailand 3. United States 1.6% Sources: World Bank, International Monetary Fund (IMF) estimates 18

19 Real Growth Rate of Per Capita Household Income YoY 12% 1 8% 6% 4% 2% -2% Average from2005 to % -6% US China HK Sources: CEIC, St. Louis Fed 19

20 Consumer Spending Backed by Big Savings, Not Debt Household savings greater than combined GDP of Brazil, India, Russia and Italy China's Bank Deposits by August 2015 Household Deposits Deposits of Non- Financial Enterprises Government Deposits Deposits of Non- Banking FI* GDP 2014 Brazil India Russia Italy Russian Federation 0 5,000 10,000 15,000 20,000 25,000 US$ BN *FI=Financial Institutions Source: CEIC, World Bank 20

21 Rebalancing Means Slower Growth is Inevitable, but Remember the Base RMB BN 8,000 12% 7,000 6, % 1 5, % 8% 4,000 6% 3,000 2,000 1, % 2% E* Incremental Increase in Nominal GDP Real GDP Growth Rate (RHS) *2020 MICM Estimate Source: CEIC 21

22 Steady Wage Growth Signals a Healthy Job Market WAGE GROWTH OF UNSKILLED FACTORY WORKERS AND SKILLED MANAGERIAL WORKERS* YoY 2 15% 1 5% -5% 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Unskilled factory workers Skilled/managerial workers MIGRANT WORKER INCOME RMB per capita 4,000 3,000 2,000 1,000 0 Mar-09 Sep-09 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 YoY 25% 2 15% 1 5% Average Monthly Income of Migrant Worker (LHS) Growth rate (RHS) *Surveys for the 4Q11 and 1Q12 time periods were not conducted. Sources: CLSA, CEIC 22

23 Regional Variations in China s Growth Story Resource extraction and heavy industry concentrated in the northeast 1H 2015 GDP GROWTH RATE BY PROVINCE Source: CEIC 23

24 Mistake 4: Misunderstanding Shadow Banking and Debt Problems Most shadow credit is from party-controlled institutions Other 2 Banker s Acceptance Bills Trust Loans Entrusted Loans H15 1 Shadow Banking Rmb New Loans Foreign Currency Loans Enterprise Bonds Stock Financing by Non-financial Institutions Sources: CEIC, MICM estimates 24

25 Party Control Regulators Applied Brakes to Trust Lending Growth rate of new trust loans slowed to -84% YoY through Sept 2015 from +532% in 2012 RMB BN 2,000 1,800 1,600 1,400 1,200 1, Q15 YoY Trust loans Growth Rate (RHS) Source: CEIC 25

26 Debt is Concentrated Among State-Owned Enterprises (SOEs) DEBT-TO-ASSET RATIO BY OWNERSHIP 7 65% 6 SOEs 55% Private Firms 5 45% Source: Hong Kong Institute for Monetary Research 26

27 Mistake 5: Misunderstanding China s Property Market 9 of new home buyers are owner-occupiers, who use a lot of cash Sep-07 2Q10 Feb-11 Aug-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 First-time buyers Upgraders Investors Source: CLSA 27

28 New home sales past peak but still healthy NEW HOME SALES BY SQM YoY Q *08-10*11-14* -9.1 Growth Rate of Residential Floor Space Sold *CAGR = Compound Annual Growth Rate Sources: CEIC, CLSA, MICM estimates 28

29 New Home Prices Softer, but Far from Collapse CLSA NEW HOME PRICES, MoM 4% 2% -2% Nov-07 Feb-09 Jun-10 Oct-11 Feb-13 May-14 Sep-15 Overall Tier-2 Tier-3 CLSA NEW HOME PRICES, YoY Nov-07 Jun-09 Dec-10 Jul-12 Feb-14 Sep-15 Overall Tier-2 Tier-3 Tier 1 cities: include Beijing, Shanghai, Guangzhou and Shenzhen Tier 2 cities: include provincial capital cities, plus Dalian, Qingdao, Ningbo and Xiamen Tier 3 cities: all other cities not included in Tier 1 and Tier 2 Source: CLSA 29

30 More than 150 Cities with a Population of One Million Plus Last year, more new homes sold in Hefei than in Beijing. More in Chengdu than in Shanghai Source: CLSA 30

31 Ghostly, or a Different Business Model? Photos on left from cbsnews.com. Photos on right by MICM. Upper right photo taken in same location as upper left. Lower right photo is not the same location as lower left, but is illustrative of traffic conditions observed in Zhengdong in February

32 China Will Continue to Drive Global Growth Contribution to Global Growth (percentage points) China United States Japan European Union Rest of World World Sources: IMF, World Economic Outlook (April 2014); IMF staff calculations 32

33 End of China s One-Child Policy Politically important, but no change to demographic trends Births per Woman : Enforcement of China s one-child policy China Japan Indonesia South Korea Thailand Source: World Bank 33

34 Active vs. Passive for China Market cap of MSCI China by sector and ownership BY SECTOR BY OWNERSHIP Food, Beverage and Tobacco 3% Consumer Staples 1% Other 28% Financials, Telecom Services, Capital Goods, Energy, Utilities and Materials 67% SOEs 71% Private Firms 29% Consumer Durables and Apparel 1% The MSCI China Index is a free float adjusted market capitalization weighted index of Chinese equities that include China-affiliated corporations and H shares listed on the Hong Kong exchange, and B shares listed on the Shanghai and Shenzhen exchanges. It is not possible to invest directly in an index. Source: CLSA; data as of November 26,

35 How We Deal With This at Matthews Asia Exposure to sectors benefiting from secular trends China China Dividend China Small Companies Matthews Aggregate Portfolio* Asia** Services Consumer Health Care Finance Manufacturing Commodities *Consists of Matthews 15 strategies, not including the ESG Strategy which incepted April 30, **Asia is a market cap weighted universe as defined by FactSet s geographic classification. Sector exposures of largest account in each strategy. Sources: FactSet, MICM; Data as of May 12,

36 Today s Speaker ANDY ROTHMAN Investment Strategist Andy Rothman is an Investment Strategist at Matthews Asia. He is principally responsible for developing research focused on China s ongoing economic and political developments while also complementing the broader investment team with in-depth analysis on Asia. In addition, Andy plays a key role in communicating to clients and the media the firm s perspectives and latest insights into China and the greater Asia region. Prior to joining Matthews in 2014, Andy spent 14 years as CLSA s China macroeconomic strategist where he conducted analysis into China and delivered his insights to their clients. Previously, Andy spent 17 years in the U.S. Foreign Service, with a diplomatic career focused on China, including as head of the macroeconomics and domestic policy office of the U.S. embassy in Beijing. In total, Andy has lived and worked in China for more than 20 years. He earned an M.A. in public administration from the Lyndon B. Johnson School of Public Affairs and a B.A. from Colgate University. He is a proficient Mandarin speaker. 36