This is a brief outline of the Presentation by Dr. Li Cong, Chief Investment Officer, Mirae Asset Global Investment (Hong Kong). The topic of the presentation was Competitiveness, Challenges and Opportunities in Investing in China.
Li Cong's Views On Competitiveness, Challenges And Opportunities In Investing In China!
Li Cong’s views on Competitiveness, Challenges and Opportunities
in Investing in China!
Author: iFAST Research Team
This is a brief outline of the Presentation by Dr. Li Cong, Chief Investment Officer, Mirae Asset Global
Investment (Hong Kong). The topic of the presentation was Competitiveness, Challenges and
Opportunities in Investing in China.
• Gross Debt to GDP of China is very low and growth in Y-o-Y Fiscal revenue is higher than Y-o-Y
growth of GDP.
• Actual GDP growth rate of China has always breached the target GDP rate.
• Liquidity i.e. M2 growth in China is very strong.
• Pressure of inflation in the country is expected to come down going forward
• Privatisation of companies in China is picking up
• The Research and Development (R&D) Spending in China is improving and expected to grow
substantially in the coming years.
• Huge Labour force and Rising urbanisation rate will boost consumption growth in China.
• Premium for Growth and quality will increase.
• Return on Capital (ROC) will decline in the years to come and investors will have to adjust their
expected return going forward.
• China and India will be the largest and second largest economy in the world respectively by
2050. So these two economies provide a structural growth opportunity for years to come.
Introduction to China
View on Government and GDP Growth
Dr.Li Cong is of the view that the Government in China is very strong and powerful both financially and
in decision-making as most of the companies in various sectors like Banking, Telecom, Energy,
Infrastructure etc. are owned by the Government. The Gross Debt to GDP is only 33% for China as
compared to 193% for Japan, 72% for UK and 76% for US.
The Y-o-Y growth in Fiscal revenue is higher than Y-o-Y growth of GDP. Also, deficit as a percentage of
GDP is negative.
China’s GDP is growing at a very rapid pace and the actual growth rate has always breached the target
rate for more than 15 years, when considering 5 year time horizons. For eg: For year 2006 to 2010,
target GDP growth rate was 7.5% whereas actual GDP growth rate stands at 11.4%.
Local and Central Governments in China have different views and land selling matters a lot for Local
Government. Most of the land in China is owned by Government and local government dependence on
land revenue accounts for 43% of the total. In terms of Fiscal revenue structure, there was huge
disparity between the central and local governments but over the years it has come down dramatically
and now revenue for both is more or less equal where the central government gains slightly more than
The M2 growth in China is very strong and currently stands at 28%. This indicates that there is enough
liquidity in the system. The Reserve Requirement Ratio (RRR) of Chinese bank is very high and currently
stands at 17%. As a result loan to deposit ratio of Chinese banks is low at about 60% to 70% which
indicates that they have enough reserves in their books.
M1, which is one of the leading indicators for inflation has shown a declining trend and in response to
that, the pressure of inflation in the country is expected to come down going forward.
Forex Reserves of China are very strong and currently stand at US$ 2,399 billion.
On the banking sector, Dr. Li was of view that the banking system is well regulated in China and it is
mainly dominated by states. When the whole world had low loan growth in 2009, the Chinese banks
provided enough loans, which really helped the country to recover fast. The lending rate for 6 to 12
months in China stands at 5.31% whereas the Deposit rate is 2.25% for a 12-month horizon. So in terms
of margins Chinese banks are very strong and enjoy high profitability. He was also of view that in terms
of financing sources for corporation, around 82.5% is from the banking sector. In China, banks have
quotas in terms of lending for the year and as a result most of lending is front loaded in a year.
Privatisation in China is picking up and from 29% in 2001, the total corporates in china are owned by
private entities stands at 68%.
One of the shortcomings of Chinese corporates is that they are weak in branding, the best brand in
China stands at the 63rd rank in branding across the globe.
The Research and Development (R&D) Spending in China is improving. However there is further scope
for improvement. R&D per personnel per 10,000 labour forces in China is only 25 as compared to 141 in
Japan, 121 in Russia, 109 in UK etc. R&D expenditure in China is about US$ 50bn, R&D expenditure as a
percentage of GDP is very low and currently stands at 1.47% whereas for USA it stands at 2.68%,
3.44%for Japan and 2.54% for Germany.
Labors trend & Consumption Growth
Huge Labour productivity and rising urbanisation rate will boost consumption growth in China. In China,
the higher institution graduates are rising rapidly which means that the new workers will be more skilled
and better educated. In addition to that, there is new regulation to increase the wage of labourers and it
is expected that it would double in the next five years. As a result it will bring strong growth in the
consumption sector. Labour in China is highly competitive and cheap. The factory worker’s salary in
China is US $ 146/ month as compared to about US $ 2917 in US. So even if the salary doubles, the
labour will remain relatively very cheap in China.
In addition to that the middle class group is growing in China and it currently stands at 31% of total
population. The strong growth in the middle class will boost the demand for cars and houses going
forward. The Motor vehicles per 1000 people in China is very low as compare to developed nations and
it is expected that this number will increase substantially. Also the mentality and behaviour of new
workers is quite different now, they are less of savers and more of spenders and as a result will lead to a
huge demand for consumer goods going forward.
Consumption as a percentage of GDP in China is 36% which is the lowest in G-20 countries. It is expected
that this percentage will improve going forward. Also the hours per day spent online per internet user in
China is 2.7 which is very high as compare to India (.5), Brazil ( .9), Russia (1.7) . So the scope for online
businesses is very huge in China.
China is an energy deficient country and more than 50% of its oil consumption is imported. It is also the
largest energy consumer in the world. Even though the efficiency continues to improve, energy
dependency ratio is still very high. Dr. Li was of the view that coal constitutes around 69% of the energy
consumption and China is planning on bring this down by an aggressive alternative energy plan. It is
expected that by 2020 alternative energy sources like Nuclear, Natural Gas, wind, solar and biomass will
account for 15% of the total Energy Consumption as compared to only 7.8% in 2009. So there is great
scope in the alternative energy sector in China.
On the back of Fed’s Quantitative easing, the Dollar’s fall, rise in Gold and Oil prices and money flowing
to Emerging Markets, Li Cong was of view that volatility in all the markets is going to increase going
forward and investors have to adjust themselves to live with volatility.
On bubbles he was of the view that it will happen in many markets and many assets. Currently a bubble
is visible in the US Govt Bond Market.
Going forward, he also expects inflation to increase worldwide. He was also of opinion that Return on
Capital (ROC) will decline in years to come and investors have to adjust their expected returns. The
returns generated in the last decade will not be matched in this decade. Lastly, he was of the opinion
that the premium to quality and growth will increase and that is the reason emerging markets can trade
at higher premiums than their historical values.
Challenges and New Models to Grow for China
Dr. Li Cong also highlighted Deng’s three step plan. According to Deng’s 3 step plan, GDP per capital of
china should increase to 4000 by 2050 as this is the yardstick for a developed nation to be judged and in
2008 the number stood at 3266. The new three step plan talks about reaching the target number of
4000 by 2020.
He was of the view that in the next decade, GDP would grow at the rate of 7.5% to 9.6%. The
contribution of Capital to GDP would decrease going forward due to lower savings ratios. The labour
contribution is also expected to decrease, but contribution from total factor productivity is expected to
increase on account of technological innovation and structural adjustment as well as reallocation of
labour from low-productivity to high productivity.
Dr. Li also highlighted the 12th
Five Year Plan of the Chinese Government and its four major themes, viz.
Structural Change Process – Through Consumption Driven Growth, Strategic Emerging industry
Development and Upgrade on traditional industry.
Efficiency Improvement – Through Industry Consolidation, Investment Return Improvement and Phase
out outdated capacity.
People’s Well- Being – Through Adjusted income distribution system, development of central & western
china and Increase medical coverage for aging population.
Environment Protection – Through lower unit GDP energy consumption, Decrease pollutant emission
and Resource conservation.
Chinese Market Outlook
Dr. Li was of view that Chinese markets are very attractively valued and China A shares are trading at
10.9 times 2011 expected earnings. MSCI China on the other hand is trading at 11 times 2011 expected
earnings.Moreover, the earnings growth in China is also strong in the years to come, specifically real
earnings growth considering that China’s inflation levels is much below other countries. This makes
China a very attractive investment opportunity.
Mirae Asset China Sector Leader Equity Fund – the feeder fund of Mirae Asset China Advantage Fund
As compared to its benchmark, the fund is currently under-weight on Financials, Energy and telecom
and over-weight on Consumer Staples, Industrials and IT.
The fund focuses mainly on large cap companies and 84.86% of the portfolio is in the Large cap space
(USD 1 bn and more). The fund takes concentrated bets and currently has only 31 stocks in the portfolio.
The fund typically does not exceed more than 40 stocks in the portfolio.
To conclude the presentation, Dr. Li said that it is expected that China and India will be the largest and
second largest economies in the world respectively by 2050. So these two economies provide a
structural growth opportunity for years to come and investors should be invested in these two markets.
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