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Investing in China Frederick Jiang, CFA

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  1. Investing in China Frederick Jiang, CFA

  2. 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

  3. 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

  4. High Return, High Volatility

  5. Consistent Earnings Growth Hang Seng China Enterprises Index - EPS

  6. Buy Low, Sell High Hang Seng China Index – Price/Earnings Multiple

  7. Opinions Diverged China will overtake the U.S. to become the world’s largest economy. ---- Jim O’Neil, Goldman Sachs

  8. Opinions Diverged The real estate bubble in China, looks like Dubai times 1000 – or worse. ---- Jim Chanos

  9. Looking Back – GDP in US$ CAGR 2.9% CAGR 10.2%

  10. Looking Back – Stock Market

  11. What drives China’s Growth? • Reform and Restructuring • Urbanization and Industrialization • Demography Dividend and Education • Savings and Capital Formation • Globalization

  12. 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

  13. What Drives China’s Growth? • Reform and Restructuring • Urbanization and Industrialization • Demography Dividend and Education • Savings and Capital Formation • Globalization

  14. What Drive China’s Growth? Urbanization -- 1.5 million per month Industrialization -- Raise productivity -- Monetize economic activities

  15. Urban / Total Population Source: United Nations, CLSA Asia-Pacific Markets

  16. What Drives China’s Growth? • Reform and Restructuring • Urbanization and Industrialization • Demography Dividend and Education • Savings and Capital Formation • Globalization

  17. Demography and Education Demography Dividend College Enrollment China’s Baby-boomer Generation Young and Educated With money, Will spend

  18. Brain power: US vs China Science and engineering PhDs Source: National Science Foundation, China National Bureau of Statistics, CLSA Asia-Pacific Markets

  19. What Drives China’s Growth? • Reform and Restructuring • Urbanization and Industrialization • Demography Dividend and Education • Savings and Capital Formation • Globalization

  20. Saving is Virtue! Total Household Deposit in China US$5.13 Trillion Total Deposit Waiting to make deposit

  21. Household Savings / Disposable Income Higher Savings Ratio, Higher Capital Formation, Higher Growth Rate Source: Euromonitor, CLSA Asia-Pacific Markets

  22. What Drives China’s Growth? • Reform and Restructuring • Urbanization and Industrialization • Demography Dividend and Education • Savings and Capital Formation • Globalization

  23. Globalization China Accounts for 10% of Global Trade

  24. 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

  25. No More Double Digit Growth

  26. Power of Compounding

  27. 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”

  28. “Housing Bubble” in China Supply and Demand in Last 10 Years (in millions) Empty Complex

  29. “Housing Bubble” in China Source: National Statistic Bureau

  30. “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.

  31. “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.

  32. Chinese Cities are Quite “Small”

  33. Another Angle: Mortgage Loan Size Mortgage to GDP: China 15%, US 82% Source: Merrill Lynch Economic Research

  34. Myth 2: China is Export Driven

  35. 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)

  36. True Export Share Source: UBS Economic Research and Waddell & Reed Estimate

  37. GDP Composition Source: Waddell & Reed Estimate

  38. Myth 3: China is Investing Too Much Chinese Consumption as % of World Total - 2010 Source: BNP Paribas Research

  39. China’s Capital Stock Total Length of Railway Total Number of Airports Total Length of Paved Roads Number of Vehicles per 1000 People

  40. Per Capita Steel Production

  41. Capital Formation as % of GDP Source: CEIC

  42. Where does the investment go? Other Services Manufacturing/Mining Property Development Infrastructure Build-out Source: China National Bureau of Statistic

  43. What support investment growth? Source: CEIC

  44. 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

  45. Real Picture

  46. Public Debt -- U.S. vs China

  47. 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.

  48. Private Debt – China vs U.S. Mortgage to GDP: China 15%, US 82%

  49. 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…

  50. Less Favorable Demography Aging Population Less number of young workers