ADAMAS CLARITY

 

By Barry Lau, Managing Partner & CIO (Private Investments)
March 2018

Beijing is currently “shut” for a fortnight in hosting the annual National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) between March 5-20th. The conference will decide on the economic targets and work plan, discuss the proposed amendments to the Constitution, approve institutional reforms, and elect the new government. In this issue of Adamas Clarity, we would like to share our thoughts on the latest, on the ground, developments from Beijing on this topical issue.

 

 

A quick reminder that China has self-proclaimed to be marching into a new economic era: President Xi’s Economic Thought on Socialist Economy with Chinese Characteristics for a New Era, “Xi-nomics”, is the guiding theory for economic work, comprising a number of pragmatic approaches to the development of China’s economy in the coming decades. These principles include a few key themes: strengthen the Party leadership; adhere to a people-centered development philosophy; adapt to the new normal of economic development; having the market play a decisive role in resource allocation and improve the role of the government; adapt to the change in major contradictions in economic and social developments and adhere to supply-side structural reforms; adopt problem-oriented deployment of a new economic development strategy; pursuing progress while maintaining stability and take a step by step forward approach.

 

The 2018 government work report

The government work report maintained the growth target at "around 6.5%" and announced a list of major economic targets for 2018:

 

Quick Review of 2017 Economic Work

China’s economic performance in 2017 deserves a high score, with encouraging progress in many aspects:

CNY appreciated against the USD in 2017, in sharp contrast to market expectations at the beginning of the year. Capital outflows came down notably (from about $650 billion per annum in 2015 and 2016 to $200 billion in 2017), FX reserves increased by USD 109 billion between end-2016 and November, and currency expectations stabilized.

Economic growth beat market expectations and real GDP growth printed at 6.9% in the first three quarters of the year. More encouragingly, this better-than expected growth performance was not driven by policy stimulus. Compared to in 2016, fiscal impulse was much smaller in 2017 and monetary policy was neutral (bias towards tightening), along with financial deleveraging and housing policy tightening in a number of cities.

Supply-side structural reform made encouraging progress. Overcapacity reductions in steel and coal industries exceeded the whole-year target by October; financial deleveraging started to take effect without generating systemic liquidity stress; housing de-stocking continued.

Corporate de-leveraging started to move in the right direction: for the first time since 2011, debt/GDP ratio started to stabilize in 2017; rebound in industrial profits reduced credit risk of corporate borrowers; weak manufacturing capex suggested that corporates used improved earnings to repair their balance sheets or reduce liabilities.

 

2018 Economic Tasks and Policy Outlook

“Pursuing progress while maintaining stability” remains the overarching principle, and 2018 economic work should follow the new development theory to pursue high quality-growth, and further promote supply-side structural reforms. Risk prevention, poverty reduction and pollution prevention are three priority tasks in 2018-2020. The government will continue to adopt “proactive fiscal policy” and “prudent and neutral monetary policy” as in 2017. In terms of risk prevention, the government will continue to crack down on illegal financial activities and build up regulatory system for the weak links, and seek to foster a virtuous circle between financial and real economy, between financial and property sector, as well as within the financial system.

8 key areas have been identified as the focus in 2018:

  1. promote the shift from “made in China” to “created in China”;
  2. improve state own asset management, support non-SOE sector and protect property rights;
  3. implement rural revitalization strategy;
  4. regional coordinated development plan, e.g. Beijing-Tianjin-Hebei and Guangdong-HK-Macao Bay Area, etc.;
  5. openness policy by relaxing market access;
  6. improve social welfare;
  7. ensure housing supply encourages both home purchase and renting;
  8. environment protection.

 

Opportunity

In relation to the above, we are especially excited about (i), (iv) and (viii). We expect to see more Chinese innovations. To that end, on the tech front, China is moving from copycat to cutting edge tech innovator, with the number of China based unicorns, private firms valued above 1bn USD, ramping up. Back in 2014, China only had around eight unicorns - now it is the proud home to circa 40% of the global unicorns. What we are seeing is China playing catchup, and it is going fast: China is spending the second most on R&D on an absolute basis globally after US; and China is filing the highest number of patents per year in the world. So despite growth in China slowing down overall, some sectors in China are clearly growing. One example of such a growth company is Ping An, with which Adamas has cooperation of fund management with, which saw profits for 2017 increase 43% compared to the previous year and that will double dividends as a result. Another example is Tencent, which was the first Chinese firm to join the US club of tech companies valued in excess of USD 500bn in late 2017. Alibaba was the second not long thereafter. We expect this development to do nothing but continue.

Another area in which China has demonstrated its creativity is the media sector. China’s Box Office increased by USD2.0 billion to USD8.6 billion in 2017 giving the Worldwide Box Office a significant boost which would have otherwise been negative without the Chinese market. The number of movie goers and movie screens in China has also grown year-on-year as the Chinese population increasingly spends more time on leisure activities. The Chinese Government has also started to offer financial incentives to movie theatres which show local films. Netflix has strengthened links with iQiyi, a Chinese streaming service. In return, iQiyi’s streaming service offers a range of Netflix originals. Furthermore, Netflix has signed an agreement with Youku for the rights of Day and Night adding to its Asian media collection. Alibaba’s Youku signed two licensing deals with NBCUniversal and Sony Pictures Television as Alibaba looks to rejuvenate its entertainment business which has faltered in recent years and looks to regain ground lost to Tencent and Baidu.

As to the major development plans, regional expansion in e.g. the Beijing-Tianjin-Hebei and Guangdong-HK-Macao Bay Area, could make these areas become even greater economies comprising close to 100m in population, if combined with good thematic, e.g. senior housing, sports venues. In fact, Beijing will be hosting the Winter Olympics in 2022, President Xi wants China to have 60m skiers and the infrastructure needed in anticipation of the Winter Olympics is well underway. There will be huge demand in terms of accommodation and all ancillary related aspects of hosting the Games. There would be great opportunities in such investment themes accordingly.

Finally, in our opinion, environmental protection is not a business but should be a way of life. It should be considered across all disciplines and thematic. We believe, being good investment professionals, we have to focus on generating returns, that’s a given, but we must also be responsible and sustainable. To that end we have voluntarily adopted in our investments the sustainable development guidelines issued by supranational development financing institutions and made ESG an integrated framework in our investment process – from deal sourcing all the way through to exit of project companies. Further, we do not view our ESG overlay as a mere box ticking exercise, but view it as adding value, both for the various stakeholders of the project company and wider society, as well as for our investors. We do not believe that taking environmental, social and governing aspects into consideration when investing is the beginning of an isolated trend - it is our strong belief that this will be the way all investments will be made in the future. 

 

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