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Brochure: China in charts - Demystifying China: myths and realities

In this publication, we attempt to debunk some of the popular “myths” about the China market and unveil the “realities” through simple yet insightful charts covering various topical and long-term themes.
19 December 2019
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    Introduction

    As China’s investment landscape is large, complex and still evolving, there are understandably many misconceptions about this market. This is partly because China’s capital markets have largely been closed off to foreign investors in the past. But some of these misconceptions also find their roots in outdated views and oversimplifications. In this publication, we attempt to debunk some of these popular “myths” and unveil the “realities” through simple yet insightful charts covering various topical and long-term themes.

    • China’s macroeconomic fundamentals remain robust. After a sharp slowdown over the past two years, China’s economy now displays signs of stability thanks to resilient domestic consumption and policymakers’ proactive stimulus measures, including increasing infrastructure spending, higher issuance of local government special bonds, and cuts in value-added tax and individual income tax
    • China’s transitioning economic model fosters higher quality economic growth. Demographic trends such as urbanisation and increasing income levels have led to stronger and more sustainable consumption in the economy and greater demand for higher-end goods and services. At the same time, Chinese policymakers have also made commitments to control pollution and develop its electric vehicle (EV) infrastructure
    • China’s onshore asset markets are more accessible and present attractive investment opportunities. Despite headlines on the pickup in default rates in China’s bond markets, defaults remain a tiny fraction of the overall onshore credit market. Even after a strong rally onshore equity markets also offer ample investment opportunities for bottom-up stock pickers
    • China has established itself as an innovation powerhouse. Supported by government spending, private investment and a growing educated workforce in higher-tech fields, China is now home to more ‘unicorns’ than the US and nearly half of the world’s 20 largest internet technology companies

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    Macroeconomic fundamentals remain robust

    Myth: With a slowdown in its economy, China is no longer the world’s growth engine.

    Reality: China still accounts for one-third of the world’s economic growth. Its contribution to global growth remains far greater than any other developed or developing country.

    Contribution to 2019 world GDP growth (forecast)

    Contribution to 2019 world GDP growth (forecast)

    Myth: China and US are decoupling amidst escalated trade tensions.

    Reality: Given the interconnectedness between the two economies through trade, investments, financial flows and other links, we believe both sides would have strong incentive to resolve the trade dispute.

    US-China FDI and sales by US foreign affiliates in China

    US-China FDI & sales by US foreign affiliates in China

    Myth: China is not doing enough to support slowing growth.

    Reality: In addition to cutting taxes and rolling out various other fiscal and monetary support measures, China approved more infrastructure investment in the first three quarters of 2019 than in all of 2018.

    China’s approval amount of infrastructure investment (CNY 100m)

    China’s approval amount of infrastructure investment (CNY 100m)

    Myth: Inflation is a rising concern.

    Reality: Pick-up in headline inflation is predominantly driven by food inflation amidst swine fever. Core inflation remains stable.

    China’s CPI measures (%)

    China’s CPI measures (%)

    Source:

    1. Bloomberg analysis of International Monetary Fund data, as of Oct 2019
    2. Bloomberg, as of Sept 2019
    3. US Bureau of Economic Analysis, Bloomberg, CEIC, HSBC Global Asset Management, as of Oct 2019
    4. National Bureau of Statistics, as of Sept 2019
    Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    One market, many opportunities

    Myth: Currency exposure to RMB is very risky.

    Reality: RMB exhibits lower volatility than select major developed market currencies.

    CNY exchange rates against major DM currencies (rebased at 100)

    CNY exchange rates against major DM currencies (rebased at 100)

    Myth: Pickup in bond defaults poses systemic risks in China.

    Reality: Defaults remain a tiny fraction of the overall onshore credit market. Moreover, the government has put an adequate number of favourable policies in place to cushion against any potential contagion.

    Defaults remain manageable

    Defaults remain manageable

    Myth: Investing in offshore Chinese equities eliminates the need for onshore investments.

    Reality: Some highly compelling investment opportunities remain exclusively onshore, so investors stand to benefit from the increased access in recent years

    Sector breakdown of MSCI All China Index

    Sector breakdown of MSCI All China Index

    Source:

    1. Bloomberg, as of Sept 2019
    2. Wind, HSBC Global Asset Management, as of 25 Oct 2019
    3. MSCI as of Oct 2019
    Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    High-end consumption, low-emission cars

    Myth: Chinese consumers are cutting back on their spending amidst growth concerns.

    Reality: China’s consumer spending is increasingly driven by purchases of high-end consumption goods by the growing middle class.

    Luxury goods market growth (%) (2019 forecast)

    Luxury goods market growth (%) (2019 forecast)

    Myth: China’s growth is always at the expense of environmental degradation.

    Reality: China’s electric vehicle (EV) sales and charging infrastructure lead the world.

    Annual EV sales (thousand cars)

    Annual EV sales (thousand cars)

    % Distribution of total households by income

    % Distribution of total households by income

    Number of EV charging stations ('000)

    Number of EV charging stations ('000)

    Source:

    1. Bain Luxury Goods Worldwide Market Study, Spring 2019. Forecast growth rate ± 1 per cent. Growth at constant exchange rates.
    2. Bloomberg, as of Sept 2019. Income measured by pre tax gross income.
    3. Bloomberg NEF Electric Vehicle Outlook 2019
    4. Bloomberg NEF, China Electric Vehicle Charging Infrastructure Promotion Alliance, as of Oct 2019
    Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

     


    Innovation more than imitation

    Myth: China does not prioritise R&D and innovation.

    Reality: China owns 46.4 per cent of all patent application filings around the globe and the Chinese government has made significant increases in its R&D spending.

    Number of patent application filings (‘000)

    Number of patent application filings (‘000)

    Myth: China lags behind technology hubs such as Silicon Valley.

    Reality: China has surpassed the US as home to more “unicorns” in 2019. There are in fact more unicorns in Beijing (82) than in San Francisco (55) and New York (25) combined.

    Number of unicorns

    Number of unicorns

    China’s fiscal expenditure on science and technology (CNYbn)

    China’s fiscal expenditure on science and technology (CNYbn)

    Three of the largest unicorns globally are from China

     Rank  Name

     Valuation (USDbn)

     Headquarters
     1  Ant Financial  150  Hangzhou, China
     2  ByteDance  75  Beijing, China
     3  Didi Chuxing  55  Beijing, China
     4  Infor  50  New York City, USA
     5  JUUL Labs  48  San Francisco, USA

    Source:

    1. World Intellectual Property Organization: World Intellectual Property Indicators 2019
    2. National Bureau of Statistics, as of Sept 2019
    3. Hurun Research Institute, as of Oct 2019. Unicorns are defined in the research as tech start-ups that are valued over USD1 billion, founded in the 2000s and not yet listed on a public exchange. Valuations are as of 30 Jun 2019
    Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

     


    Our investment view

    While we acknowledge China still faces near-term challenges as it deals with geopolitical uncertainties and an economic slowdown, the outlook for 2020 looks decidedly less pessimistic than 2019. In the absence of substantial stimulus measures, economic growth in the world’s second-largest economy has held up relatively well, in our opinion. The latest macro data from China seems to indicate the state of the economy is better than what the headline numbers suggest and its ability to weather external shocks has improved, supported by vibrant domestic consumption. The current slowdown reflects a stabilisation in the economy after the hockey stick growth witnessed in the past two decades, though the downward pressures remain evident. Nonetheless, we see signs of bottoming out in the economy. At the same time, China has continued to press ahead with key reforms including - opening up its financial and capital markets, transforming its state-owned enterprises, enabling more urbanisation and fostering innovation – thus allowing its long-term structural growth story to stay intact.

    At HSBC Global Asset Management, we remain focused on fundamentals as we continue to identify attractive opportunities in both onshore and offshore China. Our disciplined and repeatable investment process has helped us establish a solid track record over nearly three decades of managing Chinese assets. Given the evolving nature of China’s markets, we believe Chinese portfolios in particular benefit from our investment process, which puts emphasis on rigorous fundamental research. Overall, we remain constructive on China’s long-term growth story and the opportunities on offer as its economy continues to evolve.

    • In the China equities space, we remain constructive on the consumer sector given the trend of premiumisation which supports higher pricing power and margin expansion. We are also positive on IT companies as we are optimistic about 5G development. Related opportunities may be found in the onshore equity markets, home to a more comprehensive and vast investment universe when compared to the offshore markets. The Shanghai- and Shenzhen-listed A-share market is home to 50 per cent-80 per cent of companies in sectors that make up China’s “new economy”, namely healthcare, consumer products and technology
    • In China fixed income, headlines have focused on the pickup in the onshore default rate. It is important to note that defaults remain a tiny fraction of the overall market and are more idiosyncratic than systemic. Although it is not in the government’s interest to allow a systemic default, increased defaults should lead to proper pricing in credit risk and improve credit differentiation. While foreign investments to onshore bonds have concentrated notably in sovereign and policy bank bonds, with diligent research and credit selection, we believe certain very high quality segment of the untapped corporate bond market offers incremental return potential without significantly increasing credit risk exposure

    HSBC Global Asset Management is a pioneer in Chinese investments, with deep experience in investing in both offshore and onshore Chinese securities. Our large team of 60+ investment professionals located in Hong Kong and Shanghai help investors understand the changing dynamics within Chinese markets, interpret their implications in the right way and make appropriate investment decisions

    Source: Bloomberg, HSBC Global Asset Management, as of December 2019
    Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.


    Accessing China opportunities through our investment capabilities

    We offer clients fulfilment options via our fund range or, if preferred, a segregated mandate, encompassing Chinese equities, fixed income, multi-asset and passive investing.

    Key strategies Chinese equity China fixed income China multi-asset Passive China-A Passive China bond
    Key propositions
    • High-conviction and diversified portfolio focusing on stocks with below average valuation for a given level of profitability
    • Focusing actively on term structure, duration, sector allocation, product selection and credit rating
    • Mixed asset with income tilt. Flexible allocation across onshore/ offshore equities and bonds within a risk budget
    • Passive ETF tracking the progressive inclusion of China A-shares into the MSCI EM index
    • Index fund designed to offer investors a cost-efficient way to access China’s government bond market
    Investment universe
    • H-shares
    • Red chips
    • A- and B-shares
    • Onshore RMB and offshore RMB/non-RMB denominated fixed income/debt securities
    • A/B/H-shares, red chips and ADRs
    • Onshore/offshore fixed income in RMB and other currencies
    • Stocks included in the MSCI China A-share Inclusion Index
    • Bonds included in the Bloomberg Barclays China Treasury and Policy Bank 9 per cent Capped Index

    Source: HSBC Global Asset Management as at 30 October 2019.
    Any portfolio characteristics shown herein, including strategy and allocations among others, are for illustrative purposes only. The characteristics may differ by product, client mandate or market conditions. Information may be changed from time to time without notice.


    Why HSBC Global Asset Management?

    HSBC Global Asset Management is a pioneer in Chinese investments, with deep experience in investing in both offshore and onshore Chinese securities.

     Strong track record managing Chinese assets since 1992

    Chinese assets 1992

     Significant local resources and presence in Hong Kong China

    Significant local resources and presence in Hong Kong China

     A well resourced, stable and award winning team

    A well resourced, stable and award winning team

    A robust investment process built on solid proprietary research 

    A robust investment process built on solid proprietary research

     

    A network of opportunities

    A network of opportunities


    Important information

    The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

    The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

    We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

    This document has not been reviewed by the Securities and Futures Commission.

    HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited.

    Copyright © HSBC Global Asset Management (Hong Kong) Limited 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited.

    Issued by HSBC Global Asset Management (Hong Kong) Limited.


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