Structural Reforms are shaping the ‘New ... - LarrainVial
Transcript of Structural Reforms are shaping the ‘New ... - LarrainVial
Structural Reforms are shaping the ‘New’ China
For institutional investors
Victoria Mio, CFA CPA FRM
CIO China, co-Head Asia Pacific Equities
Fund Manager Robeco Chinese Equities
For professional investors
Macro: 2014 macro economic environment remain stable
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Source: CEIC, Morgan Stanley, Robeco
Robeco Chinese Equities
We expect 2014 will be a year of reform and the economic environment will be similar to 2013:
> GDP growth is likely to be around 7.5% in 2014, with growth flattening out in 1H2013 and accelerating in 2H2013.
> Consumption is likely to remain resilient, with 13% expected growth in retail sales.
> Investments are likely to decelerate further, but we still expect 16% growth in fixed-asset investment. Property FAI is likely to be the main driver; Infrastructure FAI will remain flat; manufacturing FAI will be flat to declining.
> Export is likely to be stable, with 8% growth in exports, due to the economic recovery in the US, EU and Japan.
> Inflation is likely to be under control, with CPI at 3.5%.
> Monetary policy is likely to stable, but the liquidity environment will be tight, especially in the interbank market due to financial innovation.
> Fiscal policy is likely to expansionary, with strong focus on urbanization, e.g. healthcare, pensions, public housing, the environment, and water and sewage systems.
Reforms: China’s GDP growth was driven by structural reforms
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Source: CEIC, Morgan Stanley, Robeco
Robeco Chinese Equities
Historical avg = 9.7%
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Joining WTO
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US Financial
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EU Financial
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Deepen Market-based
Reform & Urbanization
China Real GDP (2012 Price, Rmb Bn)
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Real GDP (2012 Price, US$Bn based on 2012 Exchange Rate)
1978 = US$339Bn
2012 = US$8221Bn
Reforms: China’s economy is incrementally privatized
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Source: CEIC, CLSA, Robeco
Robeco Chinese Equities
> The state-controlled sector is decreasing its influence on the Chinese economy (approximately 40%)
> The private sector employs the majority of the urban work now
Reforms: Comprehensive Reform Agenda from the 3rd Plenum
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Economic reform Political reform
Market to play ‚decisive‛ resource allocation New standards to evaluation officials
Promote ‚mixed ownership‛ of SOEs Strengthen anti-corruption efforts
Level the playing field of SOEs and private sectors Improve government budget and taxation systems
Increase SOE dividend pay-out to 30% Reform the judicial system
Set a fair, open and transparent market regulation system Social reform
Establish unified rural/urban land market Relax one child policy
Support the Free Trade Zones Strengthen social security & healthcare system
Accelerate Rmb convertibility & capital account opening Strengthen education and vocational training
Strengthen protection of intellectual property Cultural reform
Impose property tax, luxury tax, close loopholes Improve the culture market system
Promote urbanization Build a modern public cultural service system
Improve the natural resources assets property rights system Military reform
Reform environmental protection management system Deepen structural and organizational reform of the army
Accelerate the financial market reforms Promote civil-military integration
> The ‘Decisions’ (Decisions on Major Issues Concerning Comprehensively Deepening Reforms) – set out substantial and actionable reforms to realize the Chinese Dream.
> Reform Leadership Group was set up to take charge and bypass bureaucracies and interest groups.
Reforms: impacts on the economy, industry and company levels
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> The overarching theme of the Decisions is to reduce the government’s influence on the economy and let the market take on a more ‚decisive‛ role in allocating resources.
> "Deregulation" will receive top priority with the new government under the reform agenda.
> Reforms will level the playing field for state-owned enterprises (SOEs) and private sectors (POEs), and introduce more competition.
> The reform impacts on the sector are summarized below:
Sectors Impacts Reform Impacts New energy / environment +2 Deregulation (+), environment protection (+), resources pricing reform (+)
Insurance / Brokerage +2 Deferred tax (+), multi-level capital market (+), securitization (+), muni-bond and IPO reform (+)
Healthcare +2 Urbanization (+), fiscal reform (+)
Technology / consumption +1 Deregulation (+), urbanization (+), deregulation (+), urbanization (+)
Utilities 0 Deregulation (-), pricing reform (+)
Real Estate 0 Property tax (-), deregulation (-), urbanization (+)
Telecom -1 Deregulation (-)
Banks -1 Interest rate deregulation (-), allowing private participation (-), muni-bond (+), securitization (+)
High end consumption -1 Anti-corruption (-), fiscal reform (-)
Industrials / Materials -2 Anti-pollution (-), anti-corruption (-), fiscal reform (-), urbanization (+)
Traditional energy -2 Anti-pollution (-), anti-corruption (-), resource tax (-), resources pricing reform (+)
Divergence: huge performance differentials between sectors and stocks
> With the global crises behind us, fundamentals, rather than macro drive performance divergence
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Source: MSCI, Morgan Stanley, Robeco, as of January 2014.
Robeco Chinese Equities
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Average Correlation of MSCI China - Rolling Correlations based on 50-Day Daily Price Changes
Average Correlation of MSCI China Historical Avg Correlation MSCI China
SOE reform is getting imminent
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> 1. Breaking up large SOEs by separating their social functions from commercial functions.
> 2. Listing unlisted SOEs on the market.
> 3. Establishing a Temasek-like agency (or agencies) to manage portfolios of SOE shares.
> 4. Incentivizing SOE managers by lifting the cap on bonuses (currently no more than 40% of total compensation).
> 5. Purpose of these reforms is to improve SOE efficiency and to prepare them for intensifying competition from private and foreign firms.
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RMB internationalization: on the path to become a reserve currency
Data source: Bloomberg, Robeco
Robeco Chinese Equities
> The Chinese currency appreciated 21% against the USD in the past 6 years, equivalent to 3.2% per year
> The EUR and non-China BRIC currencies depreciated between 7% - 36% in the same period
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China is one of the least vulnerable EM economies to US tapering
Data source: Deutsche Bank, Bloomberg, Robeco
Robeco Chinese Equities
> China’s economic fundamentals are much healthier than most other emerging markets.
> Current account maintained a healthy surplus of about 2% in 2013 and will almost certainly stay in surplus in 2014.
Current account balance as % of GDP in 2013
A-shares could account for up to 13% of MSCI Emerging Markets Index
MSCI initiated a review in June 2013 to consider the potential inclusion of China A-shares in the MSCI Emerging Markets Index.
In an extreme hypothetical case, if the China A- share market were to be completely opened and various accessibility restrictions lifted,
China A-shares could represent up to 13% of MSCI Emerging Markets Index and China as a market could have a total index weight of close to 30% in the MSCI Emerging Markets Index
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Composition of current MSCI Emerging Markets Index Simulated Country Weight Distribution Assuming Full Inclusion
Source: MSCI
Investment themes: aligned with 12th 5 yr plan & structural reforms
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Source: NDRC, State Council announcement, Robeco
Robeco Chinese Equities
Key Reform Areas Expected Reform Measures Overweight Sectors
1) Urbanization Building urban mass transit system & other infrastructure Increase social spending on education, healthcare, pension
Intra-city Transport Cement
2) Alternative energy reforms
Reform pricing system for water and energy tariffs Resource taxes and an environmental tax
Natural Gas Wind and Solar
3) Healthcare reforms Expand access to health services to rural China Improve quality of care and deliver cost-effective care
Healthcare
4) Income growth & distribution Reduce personal income tax Transfer payment for health care, education, pension
Consumer Discretionary
5) Environmental Protection 85% of all the city waste water has to be treated Expand incineration capacity by 28% annually
Waste Water Mgt. Solid Waste Mgt.
6) Technology and innovation Government to support to stimulate consumption in: cultural, entertainment, internet, gaming, travel, IT services
Internet and hardware
7) Financial reform Rising long-end bond yield and investment liberalization Reopen the IPO market, and rising non-performing asset cycle
Insurance Brokers, AMC’s
Themes example 1): alternative energy
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> To ensure energy security and reduce the pollution stemming from traditional energy
> The Chinese government has set targets to increase the use of alternative energies, such as natural gas, solar, wind, shale gas, and bio mass.
Source: Bloomberg, Robeco, as of 20 January 2014.
Alternative Energy Reform Basket - 2013 performance
Themes example 2): environmental protection
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> China’s environmental crises has risen to a point where the government can no long ignore it.
> The government’s plan for the waste-incineration sector is for CAGR of 27.9% during the 12th FYP
> There are investment opportunities in air pollutants removal, waste-to-energy, waste water treatment, and biomass.
Source: Bloomberg, Robeco, as of 20 January 2014.
Environmental Protection Basket – 2013 Performance
Themes example 3): technology innovation
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> The mass adoption of smart phones spurs demand for mobile devices and mobile internet services
> Can you image a mobile platform developed in China that offers whatsapp + skype + instagram + google map + app store + paypal?
> Alibaba’s gross merchandise volume is already double that of Amazon and nearly 3x Ebay
Source: Bloomberg, Robeco, as of 20 January 2014.
Technology and Innovation Basket – 2013 Performance
Themes example 4): Financial reforms
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> Financial deregulation and disintermediation would be negative to the existing listed banks as they would face lower NIM and intensified competition.
> China will develop a healthier yield curve by steepening the long-end bond yield, which would be positive to insurers. Reopening of the IPO market to diversify fundraising channels is positive to the brokers. Meanwhile AMCs will benefit from China’s rising non-performing assets.
Source: Bloomberg, Robeco, as of 20 January 2014.
Financial Reform Basket – 2H 2013 Performance
Themes example 5): Healthcare reforms
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> China has rapidly extended basic medical insurance coverage to the vast majority of its urban and rural residents and strengthened its medical infrastructure at the grassroots level
> China will still need to deepen healthcare reforms. Therefore, the healthcare sector will be an attractive investment theme, particularly in the area of chemical drugs and traditional Chinese medicine.
Source: Bloomberg, Robeco, as of 20 January 2014.
Healthcare Reform Basket – 2013 Performance
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