Investment and growth in China (abstract) - Maverlinn
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Transcript of Investment and growth in China (abstract) - Maverlinn
China economy take-off has been named the mostimpressive economic phenomena of the past 30 years
Page 3
Source : IMF
Key facts :
• Population : 1.36 Bn people
• Government : CPC, sole governing party
• GDP 2014 : USD 10.13 Tn (+7,1%)
• GDP / Capita : USD 7,448
• Inflation (CPI) : 2.06%
• Trade balance : USD 60 Bn in January 2015
• Forex reserves : USD 4 Tn (est.)
China GDP growth &Investment
47,948
48,148,248,348,448,548,648,748,848,9
49
2009 2010 2011 2012 2013 2014 20150
2
4
6
8
10
12
Investment as % of GDP GDP Growth
Disclaimer : this presentation was created in 2015 and updated for the exclusive use of a conference delivered to the WhitakerInstitute, NUI Galway. This presentation must not be shared with third parties without the written prior consent of Maverlinn. Thispresentation is not fully understandable, complete and reliable without further analyses and oral explanations.
Agenda
• Initial thoughts about China economic heritage
• Money for nothing, chips for free
• The surprises of new market economics
• Mergers & Acquisitions as a plan B
• Some of the unresolved part of the forthcoming growth equation
Page 4
Fan LiJi Ran
Economy relates to the art of government in ancient China,and is a philosophical matter in ancient Greece
Page 5
Comments :
• Guan Zhong: “let merchants livetogether […] investigate the price andstock of goods”
• Shan Mo Gong: “if your people losemoney (after a devaluation), they willleave and threaten your dominance”
• Fang li: “regulating prices is good forthe market and to lever tax”
• Aristotle: without the framework ofvirtue, prosperity leads to vulgar pleasure
Aristotle
715 - 645 BC ~520 BC 322 BC
Shan MoGongGuan Zhong
Philosopher
Politicaladvisors
Market Money Stability
Virtue andProsperity
436 - 448 BC
… to David Ricardo (1772-1823)From Adam Smith (1723-1790)
“the great objects of the political economy of every country, is to increase theriches [ How to ? Ricardo ] and power of that country” [ Smith ]
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A shift occurs with Ricardo, [finance] economics emerges outof the moral framework with a focus on wealth and power
-« it is not the province of thePolitical Economist to advise:-- he isto tell you how to become rich, buthe is not to advise you to preferriches to indolence, or indolence toriches »
-« [ Economics ] is a strict sciencelike mathematics »
- Condemned Malthus for introducing« moral effects » into technical issue
-« that to feel much for others andlittle for ourselves, that to restrainour selfishness, and indulge ourbenevolent affections, constitutesthe perfection of human nature »
- « Every man, as long as he doesnot violate the laws of justice is leftperfectly free to pursue his owninterest in his own way»
Agenda
• Initial thoughts about China economic heritage
• Money for nothing, chips for free
• The surprises of new market economics
• Mergers & Acquisitions as a plan B
• Some of the unresolved part of the forthcoming growth equation
Page 13
0
2040
60
80
100120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013
Inve
stab
le a
sset
s (T
N, R
MB
)
Bank savings Governments linked funds (NSSF, CIC, SAFE)Managed assets (FMCs) Investment products (non-FMCs)
Cash, over 100 Tn RMB, is king in China, and this is againstevery possible mutual funds investments
Page 14
Invested assets in China 2005 - 2013
• Bank savings in cash represent the lion share of Chinese investments
• Investment products are growing steadily but still represent a sub-optimal fraction of investments
The lack of trust in investment vehicles has created large cash pockets
Source : PBOC, CBRC, CIRC, SAFE, Oliver Wyman
The China PE industry represents between 4 and 12% of theworld PE industry
Page 18
China USD 100 Bn compares to a world base of USD 2,400 Bn1 of PE AuM …
Source : Preqin, 2014 Global PE report
Fuzzy snapshot of the PE market :
• Estimated 10,000 deals since 2001
• Consolidated transactions est. USD 230 Bn
• AuM currently between USD 100-300 Bn
• Over 5,000 PE firms, 600 new funds / year,possibly up to 10,000 with less than 10%registered
• Over 10,000 people employed, but staff hasless than avg 5 years experience
• New players : securities firm, insurance
PE backed exit by region2008 - 2013
1 excluding dry powder est. USD 1TN
Agenda
• Initial thoughts about China economic heritage
• Money for nothing, chips for free
• The surprises of new market economics
• Mergers & Acquisitions as a plan B
• Some of the unresolved part of the forthcoming growth equation
Page 20
Stock market performance is usually heavily correlated withGDP growth expectations
8090
100110120130140150160170180190
déc-0
8av
r-09
août-
09
déc-0
9av
r-10
août-
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déc-1
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déc-1
4
Inde
x 10
0 - 3
1 D
ec. 2
008
SSE Close GDP Growth
Page 21
The odd “correlations” of the SSE …
• Since the end of 2009, the growth of China economy and the evolution of the Shanghai stock market havebeen decorrelated, showing the fragile structure of the Chinese stock markets
• An adjustment have been made abruptly since the beginning of 2014, the reason for this remains to bebetter understood
Has the restart of Chinese IPOs launched a new confidence signal ?
Source : SSE, World Bank, Reuters, Capital IQ
29,8
37,2
30,7
21,2
15,5 15,7 14,5
2008 2009 2010 2011 2012 2013 2014
P/E
Rat
io
The 2012 Xintadi trauma and the market sluggishness calledfor an emergency stop and a review of listing procedures
Page 23
The Xintadi case “wake-up” call
• The Guangdong based Xindadi Bio-Tech Co. Ltdapplied for IPO and received approval from CSRC tomove forward for listing
• Media reports started to expose a possible large fraudrelated to this IPO in July 2012
• Xindadi financials happened to be completely faked,involving local officials
• The company was removed from IPO list beforeunderwriters could sell any shares
• The case created a huge shock inside CSRC andvirtually stopped the IPO process
For PEs, no Exit means no Entrance : new portfolio investments have stopped
Agenda
• Initial thoughts about China economic heritage
• Money for nothing, chips for free
• The surprises of new market economics
• Mergers & Acquisitions as a plan B
• Some of the unresolved part of the forthcoming growth equation
Page 28
The single exit solution has created expectations specific tothe PE industry in China
• IPO was once considered the prime exit− Drying-up offerings resulted in a vacuum
• Quality secondaries would be some kindof a breakthrough− Deals over € 25 million− Case by case or small portfolios− Impact on the number of PE firms
• Quality build-up− Targeted M&A to enhance profile− Participation merge with western PE
peers
• Time for complex deals as best exitsolutions
Consequences
• “Wait and see” approach - hope thatHong Kong’s once-vibrant, now-moribund IPO market for Chinesecompanies returns to its earlier state
• Exit through China’s domestic stockmarket is now seriously blocked bybureaucratic slowdowns and anapproval backlog that even underoptimistic scenarios could take three tofive years to clear.
• The US stock market will certainlyremain off limits to most Chinesecompanies for a long time to come
• Domestic M&A is an option but forChinese players, this is considered asecond class exit compared to anIPO or an international exit
PE EXIT conditions have CHANGED
Page 30
Deal story lineDeal background
Shuanghui is backed by CDH China, Temasek, New Horizon and GS
Page 31
“Mega” M&A 2013 Case : Shuanghui (China) – Smithfield (USA)
• Shuanghui acquired Smithfield Foods in May2013 for $ 4.7 billion at a total value includingdebt of $ 7.1 billion. A 31% premium to May 29stock closing price
• Smithfield Foods made € 13.1 billion revenuesin 2012, about twice the size of its better valueacquiror, which posted $ 6.5 billion revenues
• Shuanghui was looking for a large externalpork source for China : Smithfield can provide acapacity to slaughter as many as 110,000 hogs /day. They already had a long relationship
• Smithfield Foods is known for its qualitybreeding and processing of hogs
• Smithfield Foods founded in 1936 in (USA) isthe world largest hog farmer and processor
• Shuanghui (Shineway) is a fast moving privatecompany based near Shenzhen
Agenda
• Initial thoughts about China economic heritage
• Money for nothing, chips for free
• The surprises of new market economics
• Mergers & Acquisitions as a plan B
• Some of the unresolved part of the forthcoming growth equation
Page 36
Economy initially a moral science gradually shifted approachto focus on quantitative approach and simple aggregates
Page 40
Comments :
• The growth of the “Classic” economicspace is measured by GDP growth
• GDP is an aggregate measure ofproduction equal to the sum of thegross values added of all residentinstitutional units engaged inproduction1
• The “360° extended” economic spaceintegrates all factors related todevelopment, including those usuallyunaccounted for by GDP
• The non visible face of growth createslong term liabilities or benefits e.g.environmental, ethical and societal
«Classic»Economic space
«360° extended»Economic space
1 Source: OECD
Impact ?
Excellence is what is at stakeWhat are the minimum requirements ?
There must be a price to pay for violators, and rewards for solving difficultissues - or ethics is likely to be at the bottom of companies’ priorities
Page 46
Beyond personal motivations, the general corporateenvironment will influence ethical or unethical behavior
• Before being rewarded by excellencerecognition, ethics has a cost
− Patience and focus− Determination and discipline
• Finance ethics is :
− Just not about being constraint by a setof guidelines or regulations
− Individual and collective desire to createtogether a high quality environment
− Capacity to act properly outside of a setof routines
• The minimum requirement for ethical financeare :
− Knowledge : participants are on a “levelplaying field” Use of privileged or fraudulent
information Unfair treatment between clients
− Intention matters : do you buy conflict diamonds
because they are cheap do you accept usury because it is
profitable
Conclusion
Page 50
Significant upcoming challenges
• China has now reached the limits of acceleratedGDP growth as shown in the 12th plan
• Disfunctionnal internal markets can possiblyjeopardize its transition to a more sustainable model
• Markets cannot work without trust and freedombetween the players
• China needs to work on its rich heritage and worldbest practices to fix this problem
• This will require another transformation of theChinese society and beyond