Demystifying the Dragon:                   Myths and Realities of Investing in China             Fabrice Jacob, CEO, JK Ca...
China: A model that raises suspicions and fears                                                                           ...
China: A model that raises suspicions and fears                                                                An unpreced...
The biased prism of Western observers                                                                                     ...
The biased prism of Western observers                                                                                  GDP...
The biased prism of Western observers                                                                                     ...
False Ideas about China                                                                                                   ...
False Ideas about China                                                                                                   ...
False Ideas about China                                                                                 “China is the Unit...
False Ideas about China                                                                 “Property prices in China have bec...
False Ideas about China                     “There is no genuine demand for property in China, it’s all speculation”     T...
False Ideas about China                            “There is no genuine demand for property in China, it’s all speculation...
China’s Challenges                                                                                                        ...
China’s Challenges                                                                                                        ...
China’s Challenges                         After having been a strength, Chinese demography will become a burden       Dem...
How to invest in China?                                                                                                   ...
DisclaimerThe information and material provided herein does not in any case represent advice, offer, solicitation or recom...
As a multi specialist asset manager, La Française AM has a management approachbased on unwavering convictions. Both invest...
Upcoming SlideShare
Loading in …5
×

Demystifying the Dragon: Myths and Realities of Investing in China - Presentaton: Fabrice Jacob, CEO, JK Capital Management Ltd, European Pensions & Investments Summit

420 views
356 views

Published on

For more information contact: emailus@marcusevans.com

Fabrice Jacob who is the CEO at JK Capital Management Ltd. and shared his presentation titled "Demystifying the Dragon: Myths and Realities of Investing in China" at the marcus evans European Pensions and Investments Summit on 12, May 2012.

Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today.

For more information contact: emailus@marcusevans.com


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
420
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Demystifying the Dragon: Myths and Realities of Investing in China - Presentaton: Fabrice Jacob, CEO, JK Capital Management Ltd, European Pensions & Investments Summit

  1. 1. Demystifying the Dragon: Myths and Realities of Investing in China Fabrice Jacob, CEO, JK Capital Management Ltd. European Pensions & Investments Summit 2012Grand Hotel Huis ter Duin, Noordwijk aan Zee, The Netherlands, May 15, 2012 This document is intended for professional investors as defined in the MIFID
  2. 2. China: A model that raises suspicions and fears The fastest growing economy in the world Between 1990 and 2011 – China has grown faster than any other economy to become the 2nd largest in the world GDP 1990 GDP 2011 USD 3x World 22 Trillion USD 70.2 Trillion USD 357 Billion China 1.6% of the world 20x USD 7.3 Trillion 10.4% of the world USD 317 Billion India 1.4% of the world 5x USD 1.7 Trillion 2.5% of the worldSource: Bloomberg , World Bank, IMF – April 20122 This document is intended for professional investors as defined in the MIFID
  3. 3. China: A model that raises suspicions and fears An unprecedented economic recipe Chinese growth model is unique Five-year plans dictate the growth paths Foreign players are kept on a tight leash. Many of them are forced to partner with local companies Trade barriers are everywhere Local companies in strategic sectors are heavily subsidized, especially those that invest overseas Building infrastructures became a top priority 30 years ago, well ahead of any other Asian country Any form of political opposition to the ruling party is systematically crushed  Yet, China received 10x more foreign direct investments than India in the past 15 years China’s economic growth model is not unique in the principles it uses. It is unique as it should have collapsed long ago.3 This document is intended for professional investors as defined in the MIFID
  4. 4. The biased prism of Western observers GDP growth under excessive scrutiny At the beginning of each year the NPC gives its growth target for the year. In 2012, it raised concerns and took the market down… China’s annual GDP growth target 16 14 Official GDP Growth Target 12 10 %8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: National Bureau of Statistics, Capital Economics - February 20124 This document is intended for professional investors as defined in the MIFID
  5. 5. The biased prism of Western observers GDP growth under excessive scrutiny …. and yet it has never been a good proxy for Chinese growth China’s GDP growth vs official target 16 China GDP Constant Price Cumulative YoY 14 Official GDP Growth Target 12 10 % 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: National Bureau of Statistics, Capital Economics - February 2012 E5 This document is intended for professional investors as defined in the MIFID
  6. 6. The biased prism of Western observers CPI as the barometer of Chinese health CPI was once a big subject in China. It no longer is but appears to have remained for many the indicator of China’s health, with any spike raising the ghost of a “hard landing” Consumer Prices (% Change YoY) 25 20 15 10 “Chinese inflation is up again [...] putting 5 China back in an old bind: How to support growth without unleashing the dragon of 0 inflation?” -5 Financial Times 10/04/12 Jan-05 Jun-06 Oct-07 Mar-09 Jul-10 Dec-11 FOOD NON FOOD OFFICIAL CPI Source: National Bureau of Statistics, Capital Economics February 2012  An exceptionally cold month of March caused a spike, not mentioned by any Western newspaper China’s GDP growth has become so important in western minds that every single macro data is scrutinized by analysts who look eager to find signs of impending doom6 This document is intended for professional investors as defined in the MIFID
  7. 7. False Ideas about China “China is highly dependent on exports” Net Exports contribution to GDP Gross Exports as a share of GDP 2011 China GDP Breakdown (Expenditure Approach) China 26% (2005 - 2011E)100% India 18% 80% South Korea 50% 60% Taiwan 66% 40% Thailand 66% 20% Malaysia 81% 0% 2005 2006 2007 2008 2009 2010 2011 Net exports Capital Formation (Est) Government Consumption Private Consumption Source: Bloomberg data - April 2012 Note: National Bureau of Statistics, Capital Economics – March 20127 This document is intended for professional investors as defined in the MIFID
  8. 8. False Ideas about China “China is highly dependent on exports” And gross exports figures often do not reflect the true nature of Chinese exports Retail price breakdown of a $600 iPhone 4S Imported Components from Taiwan, Korea, Japan and the US: $177 Apple’s profit: $404 China Components: $11 China Assembly cost: $8 Source: KGI estimates – April 2012 In China’s exports numbers, an iPhone accounts for $196, not for the $19 local added value8 This document is intended for professional investors as defined in the MIFID
  9. 9. False Ideas about China “China is the United States’ largest banker” US Treasuries outstanding: US$ 15 trillion China total FX reserves: US$ 3.3 trillion China’s reserves invested in US Treasuries: US$ 1.1 trillion US Treasury Ownership US Institutions and Individuals 42.3% Social Security Trust 15.8% 67.4% US Civil Service Retirement Fund 7.1% Other Public Funds 2.2% Foreign Ownership 32.6% of which China 7.6% Source: US Federal Reserve Bank as at December 20119 This document is intended for professional investors as defined in the MIFID
  10. 10. False Ideas about China “Property prices in China have become unaffordable” Property prices have risen in China, but salaries have risen even faster with the emergence of a large middle class Property Price to Wage Ratio (index 100 in 2000) 110.0 100.0 90.0 80.0 70.0 60.0 50.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 E Source: National Bureau of Statistics, Bloomberg, Capital Economics - April 2012; Note: CE 2012 Estimates based on Q1 2012 data Note: CE 2012 Estimates based on Q1 2012 data 4% of sales are in Tier 1 cities, 69% are in Tier 3 where prices are 68% below Tier 1 (source: CLSA – April 2012)10 This document is intended for professional investors as defined in the MIFID
  11. 11. False Ideas about China “There is no genuine demand for property in China, it’s all speculation” The number of flats built every year in China often leads to the assertion that no matter how big the population is, such demand has to be speculation. It is forgetting the unique combination of 3 factors: Property ownership only exists since 1993 In most cities and because of the gender imbalance, a young man will find it very difficult to get married if he doesn’t own a flat Confucianism: A cornerstone of Chinese culture is “filial piety" (xiao [孝] in Mandarin Chinese), the attitude of obedience, devotion and care toward one’s parents. An urban couple with one child and two sets of parents has an ultimate objective to own 3, if not 4 flats. The real issue is they are often not allowed to.11 This document is intended for professional investors as defined in the MIFID
  12. 12. False Ideas about China “There is no genuine demand for property in China, it’s all speculation” Property ownership in China remains low, first time buyers drive the market while investors account for a marginal part Property buyers’ profiles Property Ownership in China - 2011100% 7% 60.0% 53.8%80% 48.9% 34% 50.0%60% 40.0% 30.0%40% 59% 30.0% 24.0%20% 20.0% 0% 10.0% Feb-11 Feb-12 Oct-10 Apr-11 May-11 Jul-11 Nov-10 Dec-10 Nov-11 Dec-11 Jan-11 Sep-07 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Aug-11 Sep-11 Mar-08 Mar-11 Jun-11 Jan-12 Mar-12 0.0% Tier 1 Tier 2 Tier 3 National Cities Cities Cities AverageSource: CLSA – April 2012 First Time Buyers Upgraders Investors Source: CLSA – April 2012 12 This document is intended for professional investors as defined in the MIFID
  13. 13. China’s Challenges China is addicted to investments Despite retail sales increasing by 15% year on year, China relies far too much on investments Consumption & Investment (% of Nominal GDP) 80.0 60.0 40.0 20.0 Household & Government Consumption Investment & Inventory Building 0.0 Source: National Bureau of Statistics, Capital Economics – March 2012 Such an imbalance is unsustainable in the long run…13 This document is intended for professional investors as defined in the MIFID
  14. 14. China’s Challenges China is addicted to investments Investments in infrastructures are still in strong demand: the freight train network example Freight traffic by rail 35 000 30 319 Freight Traffic (1000 ton- 30 000 kilometre /kilometre) 25 000 20 000 15 000 10 000 5 000 0 USA Germany France UK Japan Russia China India Source: CICC Research – February 2012; Note: 2010 data for China, 2007 data for other countries ... but for another few years, a high level of infrastructure investments should not be a concern14 This document is intended for professional investors as defined in the MIFID
  15. 15. China’s Challenges After having been a strength, Chinese demography will become a burden Demography is a real challenge for China in the long run as the population is ageing and the gender imbalance is not closing Chinas Population (m) Chinas labor force 500 1 800 1 600 995 400 1 400 1 200 990 300 1 000 800 985 200 600 980 100 400 200 975 - - 2000 2010 2020 2030 2040 2050 970 Population above 60 Years Old (in Million) Total Population (in Million) - RHS Source: China Population and Development Research Center – March 2012 Source: US Census Bureau – March 2012 China also faces other challenges along the road such as corruption and pollution15 This document is intended for professional investors as defined in the MIFID
  16. 16. How to invest in China? A combination of two approaches A Top-Down approach: Never stand against the wind ! The wind from Beijing is always the strongest A Bottom-Up approach: 1. Check all connected transactions 2. Beware of auditors outside the big four 3. Keep a close eye on inventory and receivables 4. Both large cash balance and large debt is never a good sign Parmalat syndrome 5. Go on site very often, don’t take anything for granted ! China is not always easy to understand at close range, it becomes almost impossible from a distance. The key to successful investments is proximity.16 This document is intended for professional investors as defined in the MIFID
  17. 17. DisclaimerThe information and material provided herein does not in any case represent advice, offer, solicitation or recommendation to invest on specific investments. Allinformation and data included in this document is considered as accurate at the date of its preparation considering the economic, financial and stock-exchangerelated context at that date and reflect the perspectives of La Française AM on the markets and their evolution. It is subject to change and does not represent orcreate contractual obligations. It should be noted that past performance does not necessarily determine future performance which may vary over time. With regardto financial, economic and stock-exchange related risks, no guarantee can be issued that the present products will attain their stated objectives.Investment products referenced in this presentation are not directed at and suitable for all types of investors. Potential subscribers are requested to carefully andindependently assess the legal and commercial documentation provided and notably the risks entailed and to seek appropriate professional advice wherenecessary (including regulatory and fiscal aspects) in order to determine the investment product’s potential to reach predefined investment objectives.The legal and commercial documentation are available on the site of the group La Française AM andor on the simple request with your usual financialinterlocutor.This document and all information contained within are strictly confidential. The material provided herein is for informational purposes only and is directed only atthe person it has been delivered to by La Française AM International (international distribution platform of La Française AM). All distribution / disclosure of any ofthe contents of this presentation to third parties in any form is strictly prohibited unless prior written agreement is given by La Française AM. In addition, all names,trademarks, logos and slogans identifying products or services of La Française AM are exclusive property of La Française AM and are restricted from use of anykind unless prior written agreement is given by La Française AM.This presentation has been prepared by La Française AM Financial Services, regulated by the “Comité des Etablissements de Crédit et des Entreprisesd’Investissement” as investment services provider under the number 18673 X, affiliate of La Française AM, a group of asset management which is constituted bythe following management companies: La Française des Placements approved by the “Autorité des Marchés Financiers” under N GP97076 on July 1st, 1997,LFP-SARASIN AM approved by the “Autorité des Marchés Financiers” under N GP9755 on June 30th, 1997, LA Française Real Estate Managers approved by the“Autorité des Marchés Financiers” under N GP07000038 on June 26th, 2007, UFG Private Equity approved by the “Autorité des Marchés Financiers” under NGP04000032 on April 27th, 2004, La Française AM Gestion Privée approved by the “Autorité des Marchés Financiers” under n°GP00058 (ORIAS 07 004 637) onDecember 31st, 2000, and La Française AM International approved by the CSSF on December 20, 2002.JK Capital Management Ltd. is an affiliate of La Française AM and is registered with the Hong Kong Securities and Futures Commission.This presentation is not subject to the approval of the local Regulator. This document is intended for professional investors as defined in the MIFID
  18. 18. As a multi specialist asset manager, La Française AM has a management approachbased on unwavering convictions. Both investor interest and satisfaction are made apriority.Through a long term approach and the association of two core competencies, realestate and securities, La Française AM offers innovative investment solutions to awide customer base, both in France and internationally, including: institutionalinvestors, networks, banks, financial advisors and private investors.As a responsible actor within the market, the management philosophy of LaFrançaise AM is founded on the principles of Asymmetrical Management TM * and isforward looking, tomorrow’s challenges forging today’s convictions.With over €35 billion in assets under management and independent in the exercise ofits business, La Française AM has an original shareholder structure with CréditMutuel Nord Europe, a well-known banking structure, other institutional investors andcompany directors and employees.*this approach aims to limit capital risk in bear market environments with a potentially lower performance in bull marketenvironments. Objective: catch 70% of market rises and only 30% of market falls173, boulevard Haussmann 75008 Paris – France – Tel. +33 (0)1 44 56 10 00 – Fax +33 (0)1 44 56 11 00www.lafrancaise-am.comLa Française AM - Société Anonyme au capital de 70 202 440 € - 480 871 490 RCS PARIS

×