WHAT ARE THE IMPLICATIONS FOR THE WORLD ECONOMY? Expert: Rob Secker, Portfolio Specialist, T Rowe Price. Facilitator: Frank Potaczek, Independent Consultant
- Volatility within Chinese markets has been a cause of concern in recent months. But investment opportunities are still good.
- There have been a series of governmental regulatory policies that have caused volatility – but the intentions are good, namely are to tackle the disparities seen at both the individual and corporate level to better distribute wealth throughout society.
- Active managers have consistently outperformed the MSCI China index and there is more to come as the economy grows and the corporate sector remains dynamic.
- A bottom-up approach makes for granular level intelligence on the investment universe for a thorough investment process.
Volatility within Chinese markets has been the cause of concern in recent months. But scratch beneath the surface and the cause is part of a long-term theme of controlled capitalism delivering growth and development. Opportunities for investment are good.
The government is looking to a fairer and prosperous society for all and is making changes to enable that happen. Change goes with uncertainty hence the recent market volatility. But dig deeper and the index volatile we have witnessed has been exacerbated due to its composition with a small number of large companies dominating the main China indices. There are, in fact, over 5,000 investable companies in China but over two thirds of the main China indices belong to just the top 100 companies.
With volatility comes opportunity and China is a market where competent managers can add value. Active managers have consistently outperformed the MSCI China index and there is more to come as the economy and the corporate sector continue to evolve. Currently Chinese companies represent only 2% or 3 % of the MSCI All World index- yet the economy is the world’s second largest. This points to market growth which will give investors more to go at.
With that in mind we look to a more sustainable future – the current regulatory cycle is merely a part of a long-term process. The latest moves, targeting large monopolistic corporations is just one of a series looking to make life more evenly balanced and to share wealth throughout society. For example, Alibaba, the e-commerce giant, would tie its vendors to exclusive distribution arrangements and has been fined 18.2 billion yuan ($2.8 billion) for its efforts. This amounts to around 4% of sales and makes the previous record penalty of $975 million given to chipmaker Qualcomm in 2015 look modest.
In this sense the government is fulfilling a role similar to the monopolies and mergers commissions that we have in the west. As companies have grown in terms of the economic and societal importance the regulation around them has been increased. But we believe that the government will still let private companies and entrepreneurialism thrive, after all more people are now employed by private organisations than public ones.
Other moves that demonstrate the maturing economy is the focus on research and development. When China joined the WTO, it became the world’s low-cost manufacturer but is now moving up the value chain, manufacturing more complex, higher margin products and in turn outsourcing basic manufacturing to cheaper countries such as Vietnam and Bangladesh. China’s continued economic development requires a skilled workforce as well as a culture of innovation and entrepreneurial zest.
But even if the general direction of travel is good investors need to know whether their investments are safe and for that, feet on the ground are needed. A bottom-up approach and a thorough investment process are essential.
From a corporate governance perspective Chinese firms are generally good, however where we see clear room for improvement is with the level of corporate disclosure. Here is where having a team on the ground engaging with companies supports change.