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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

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ways to play china
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
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

consistent earnings growth
Consistent Earnings Growth

Hang Seng China Enterprises Index - EPS

buy low sell high
Buy Low, Sell High

Hang Seng China Index – Price/Earnings Multiple

opinions diverged
Opinions Diverged

China will overtake the U.S. to become the world’s largest economy.

---- Jim O’Neil, Goldman Sachs

opinions diverged1
Opinions Diverged

The real estate bubble in China, looks like Dubai times 1000 – or worse.

---- Jim Chanos

looking back gdp in us
Looking Back – GDP in US$

CAGR 2.9%

CAGR 10.2%

what drives china s growth
What drives China’s Growth?
  • Reform and Restructuring
  • Urbanization and Industrialization
  • Demography Dividend and Education
  • Savings and Capital Formation
  • Globalization
reform and restructuring
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 growth1
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
What Drive China’s Growth?

Urbanization

-- 1.5 million per month

Industrialization

-- Raise productivity

-- Monetize economic activities

urban total population
Urban / Total Population

Source: United Nations, CLSA Asia-Pacific Markets

what drives china s growth2
What Drives China’s Growth?
  • Reform and Restructuring
  • Urbanization and Industrialization
  • Demography Dividend and Education
  • Savings and Capital Formation
  • Globalization
demography and education
Demography and Education

Demography Dividend

College Enrollment

China’s Baby-boomer Generation

Young and Educated

With money, Will spend

brain power us vs china
Brain power: US vs China

Science and engineering PhDs

Source: National Science Foundation, China National Bureau of Statistics, CLSA Asia-Pacific Markets

what drives china s growth3
What Drives China’s Growth?
  • Reform and Restructuring
  • Urbanization and Industrialization
  • Demography Dividend and Education
  • Savings and Capital Formation
  • Globalization
saving is virtue
Saving is Virtue!

Total Household Deposit in China

US$5.13 Trillion

Total Deposit

Waiting to make deposit

household savings disposable income
Household Savings / Disposable Income

Higher Savings Ratio,

Higher Capital Formation,

Higher Growth Rate

Source: Euromonitor, CLSA Asia-Pacific Markets

what drives china s growth4
What Drives China’s Growth?
  • Reform and Restructuring
  • Urbanization and Industrialization
  • Demography Dividend and Education
  • Savings and Capital Formation
  • Globalization
globalization
Globalization

China Accounts for 10% of Global Trade

drivers for the growth in next decade
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

myth 1 massive real estate bubble
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
“Housing Bubble” in China

Supply and Demand in Last 10 Years

(in millions)

Empty Complex

housing bubble in china1
“Housing Bubble” in China

Source: National Statistic Bureau

office bubble in china
“Office Bubble” in China

Myth: “30 billion square feet of office under-construction”

Facts: 18 billion square feet all together, residential, office, commercial.

Facts: office under-construction is 1.3 billion square feet, not 30 billion.

housing price bubble in china
“Housing Price Bubble” in China

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.

another angle mortgage loan size
Another Angle: Mortgage Loan Size

Mortgage to GDP: China 15%, US 82%

Source: Merrill Lynch Economic Research

gross export vs net value added
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
True Export Share

Source: UBS Economic Research and Waddell & Reed Estimate

gdp composition
GDP Composition

Source: Waddell & Reed Estimate

myth 3 china is investing too much
Myth 3: China is Investing Too Much

Chinese Consumption as % of World Total - 2010

Source: BNP Paribas Research

china s capital stock
China’s Capital Stock

Total Length of Railway

Total Number of Airports

Total Length of Paved Roads

Number of Vehicles per 1000 People

where does the investment go
Where does the investment go?

Other Services

Manufacturing/Mining

Property Development

Infrastructure Build-out

Source: China National Bureau of Statistic

myth 4 china s debt bomb
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

public debt u s vs china1
Public Debt – U.S. vs China

U.S. China

Federal Government93%24% (17%+7%)

State Government 7% 10%

Local Government 11% 17%

Gross Public Debt 111% 51%

Medicare Shortfall 166% 25%

Social Security shortfall 37% 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
Private Debt – China vs U.S.

Mortgage to GDP: China 15%, US 82%

not without road blocks
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
Less Favorable Demography

Aging Population

Less number of young workers

structure inflation
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
High Environmental Cost

Pollutions Cost China as Much as 2-3% of GDP

imbalanced economic structure
Imbalanced Economic Structure

U.S. China

Personal Consumption 70% 34%

Government Spending 19% 21%

Investment 15% 33%

Net Export -3% 12%

Total 100% 100%

investment implication
Investment Implication

China Offers Long Term Growth Opportunities

Different Ways to Play China

Not for Faint Heart

10 000 growth at different rate
$10,000 Growth at Different Rate

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.