China: Source of change and evolution, reason for optimism
Updated: 2013-01-25 06:44
By Robert Horrocks(HK Edition)
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Recently, in discussing China with quite pessimistic Hong Kong investors, I found myself disagreeing with them time and again even though their various points had some merit. I became the "non-consensus view." But considering China's 10X forward 12 months earnings, a 2.5 percent dividend yield and nominal GDP growth of approximately 10 percent as of mid-December, I am happy to hold this contrarian view.
It's easy to focus on China's problems but the Chinese are focusing on the solutions. In my mind, China is a source of change, vibrancy and evolution.For all these criticisms, I have experienced a China that has evolved too much, due to the actions of both the government and individuals, to allow itself to stand still and accept mediocrity.
China's fundamental story of the past few decades has been of government making room for the private sector to flourish. As a student in Beijing in the 1980s, I saw numerous factories all churning out the same goods-Mao suits, Mao hats and police uniforms. Factories were distinguished by number: Beijing hat factory No 1; hat factory No 2, etc. So the lack of competition or profit motive was obvious. But I also remember the kiosk at my university, run by an elderly Shanghainese woman who sold beer and cigarettes. The beer, a potentially fatal local brew due to the fungus growing in the bottom of the bottles, was, at 2 cents each, nevertheless impossible for British students to resist. For a few dollars, you could buy her entire stock and lug it back to the dormitory. In a state-run economy with no personal incentives, nothing would ever change. But even back then, this vendor, who was old enough to remember what capitalism used to be like, was not going to let the opportunity of thirsty British students slip by. Progressively, she stocked less moldy, less dangerous beers until she was selling Singaporean, Japanese, American and Irish household brands by the end of the academic year. Where she got them, I'll never know. To this day, whenever someone describes their impression of China to me, I recall this story to remind me of how quickly things can change.
People have criticized China's banks and rightly so. Government-directed lending is inefficient and nonperforming loans are likely to rise. But remember that China's nonperforming loans were estimated at 40 percent of GDP in the late 1990s. Yet between 2000 and 2010, China's economy grew at nearly 20 percent annually in US dollar terms, according to the International Monetary Fund. Today, China is damned if it does and damned if it doesn't.
China has a high-wage growth model, and the purpose of its growth is to raise people's wages. Skilled labor now earns a high market price. In a single month, my college lecturer in Beijing was paid the equivalent of one night's stay in a Western hotel. Now, China can attract high wage earners for senior positions in some of its largest enterprises as it seeks to lure expertise into the economy to continue its modernization, productivity growth, and, yes, raise wages. In the sphere of productivity growth, China is acting as a role model for the entire region.
I do agree that China needs to embrace new technology, but disagree that the only value to be created is through innovating new technology. The idea that copying is a valueless pursuit is misguided. You can create value by learning about the products, manufacturing processes, logistics, marketing and financing techniques that other economies have already refined. Why not? As an investor, I do not care too much if China's companies are copying business models from established companies overseas.
China has also demonstrated to its neighbors how to grow productivity based on more efficient capital investment. Asia is now the world's fastest-growing region in terms of efficiency of investment. Less wealthy nations in Asia are following-consciously or unconsciously-in China's footsteps.
The author is chief investment officer at Matthews Asia, an asset manager . The views expressed here are entirely his own.
(HK Edition 01/25/2013 page2)