Chinas Effect on the World How Government Policy Impacts Investors - - PowerPoint PPT Presentation
Chinas Effect on the World How Government Policy Impacts Investors - - PowerPoint PPT Presentation
Chinas Effect on the World How Government Policy Impacts Investors NSBO China Policy & Investment 1. CHINAS IMPACT ON THE WORLD Major impact for the global economy due to the rise in China 2. GOVERNMENT INFLUENCE: Decisive factor for
NSBO China Policy & Investment
- 1. CHINA’S IMPACT ON THE WORLD
Major impact for the global economy due to the rise in China
- 2. GOVERNMENT INFLUENCE: Decisive factor for investment
Government owns the major companies in strategic sectors and controls economy and industry targets and performance.
- 3. KEY STRENGTHS: Chinese focus and expertise
Experienced executive team with growing pool of Chinese analysts and industry advisors.
- 4. NSBO’s BEIJING BUILD-OUT: Six-year development
Beijing office provides on-the-ground insight and contact with policy decision-making arena.
- 5. RESEARCH PRODUCT: From policy to investment
Outline of daily, monthly and bespoke research capabilities.
- 6. POLICY INVESTMENT MODEL: When policy makes a difference
Consistent sector outperformance based on NSBO policy recommendations.
- 7. MEET & GREET: Insight from the horse’s mouth
Meeting analysts and advisors in Beijing, Shanghai, London, Hong Kong.
- 8. CHINESE DEBATES: Hard or soft landing?
Key positions on property, banks, consumer and capital account opening.
NSBO CHINA: Providing insight into China
NSBO CHINA:
- We track China’s government policy and economy, providing a unique insight and read-across for investment and
sector strategy.
- This comes from our office of analysts and advisors in Beijing, giving investors insights to key policy strategy and
thinking. CHINA TODAY:
- China has risen from being No.7 in the global economy to No.2 over the past ten years and is projected to catch up with the US over
the next ten.
- To date, this has provided the world with cheap capital, cheap labour and cheap goods, benefitting manufacturers , the US Treasury
and Western consumers. CHINA OVER THE NEXT TEN YEARS: 1. Capital is going to become more expensive as financial reforms are implemented. 2. The RMB will move from being a managed, closed currency to a major Asian trading currency and its increased volatility may destabilise both global and domestic markets. 3. Chinese consumers will have more money to spend, but are not necessarily buying Western goods or becoming Western consumers. 4. Greater domestic technology and development will challenge global manufacturers and undermine their investment in China as well as sales to the global market. 5. China will continue to buy strategic and resource assets, particularly energy, leading to greater global competition and international tension. 6. Current faults in the political system are beginning to be felt and may lead to greater reform or, more dangerously, a bigger crack- down, affecting both China, regional development and international relations. Few markets will remain unaffected and Western multinationals and resource companies face an increasingly difficult time negotiating with a rising giant.
GOVERNMENT INFLUENCE: Decisive factor for investment
Overall policy
- Government has major role in corporate decisions through policy and ownership
- SASAC owns 120 of the largest companies in China and governs their development
- Answering to shareholders comes secondary to national interest for key sectors
- Central and local government policy can differ and ongoing battles between the two
Sector plans
- Overall sector development governed by Five Year Plan targets – currently being set
- Governs foreign investment in key sectors – eg restricted in telecoms and power, but
encouraged in advanced manufacturing
- Acquisitions and management changes governed by central decision-making
0% 20% 40% 60% 80%100% Personal Goods General Retailers Household Goods Real Estate Technology Hardware Support Services Electronic & Electrical Industrial Engineering Construction Mobile Travel & Leisure Industrial Metals Electricity Food Producers Life Insurance Banks Autos Mining Oil & Gas
Government ownership by sector
Bank Central Huijin Ministry of Finance ICBC 47% 47% Bank of China 96% ABC 44% 43% CCB 2%
Examples
- Telcos – China Mobile the largest mobile operator in the world (>500m customers) but telco sector was divided up between
its main competitors, China Telecom and China Unicom, to its cost
- Property – purchase restrictions put in place by central government are causing 15-20% drop in house prices in major cities.
Now policy needs to ease in order to restimulate economy.
- Rare earths – sector policy is forcing consolidation and limiting production by smaller producers, leading to trade war and
higher prices Government shareholdings of major banks
NSBO’S KEY STRENGTHS: Chinese focus and expertise
Executive Team
- Chairman, Derek Han – Chinese knowledge, contacts and leadership
- Chief Executives, Richard Abrahams and Laurie Pinto – wide network of contacts in London, New York and Hong Kong and
- ver 25 years sales experience
Beijing Office
- Based in Beijing, not Hong Kong or Shanghai, giving better access to government thinking and experienced advisors
- Chinese staff and research, not a Western institution or interpretation
- Growing pool of academic/think-tank advisors to give policy insight & direction
- Relationship with GAPP and Xinhua gives status and security onshore
London Office
- Provides sales and regular client contact, feeding investment ideas and recommendations to clients in London, Europe,
Hong Kong and New York
Key Bios
Richard Abrahams, CEO Before founding North Square Capital in 2008, Richard was CEO and Head
- f Trading at Pali International, where over his tenure the firm established
itself as a leader in event-driven equity research and execution. Prior Pali, Richard was head of equity of HSBC in the US. Laurie Pinto, Co-CEO Prior to founding North Square Capital in 2008, Laurie was Chairman and Head of Sales at Pali International, where over his tenure the firm established itself as a leader in event-driven equity research and execution. Laurie brings over twenty years' experience to the firm. Prior Pali, he was a director at DLJ and then Dresdner. Derek Han, Chairman Derek is a former Chairman of PG Partner Bank in Zurich and has been a foreign exchange advisor at Frema Invest, a board member of Ineo, and of Banque SCS Alliance. Derek is also a world-renowned concert pianist, he graduated from the Juilliard School, one of the most prestigious performing arts college of the world, at age 18.
NSBO’s BEIJING BUILD-OUT: 6 year development
NSBO’s Chinese Research Time line
2007
Set up office in Beijing – research development and advisory network
2008
Launched Chinese government policy research from London
2009
Merger with North Square in London to build up sales representation and capacity
2010
Built up team in Beijing with greater number of analysts and advisors
2011
Widened client focus to Hong Kong and New York, as well as Europe
2012
Launched Policy Investment Model demonstrating
- utperformance of NSBO China’s policy recommendations
vs the HSCEI
NSBO Research network
Beijing office provides research, insights and policy interpretation. Feeds through into sector and company analysis from policy perspective. Investment idea generation and trading calls in London based on policy and industry analysis.
NSBO Beijing Office
- Team of analysts in major policy sectors
- Financials
- Energy
- Trade/Currency
- Property
- Metals
- Advisory network in research/academic institutions
- Economics
- Financials
- Property
- Food & Agriculture
- Autos
- Telcos
- Ad-hoc advisors on specific sectors/topics
RESEARCH PRODUCT: From policy to investment
Daily Research
Chinese policy round-up International impact round-up China Policy Focus
CHINA POLICY WATCH, 20 MAR 2012 CURRENCY: RMB REFORM PROMOTED TRADE: CHINA MAY RELEASE MEASURE TO SUPPORT EXPORT IN APRIL ECONOMY: SASAC PLANS CAPITAL INJECTION TO SOME CENTRAL SOES OIL & GAS: PETROL PRICES ADJUSTED, OIL PRICE BENCHMARK TO BE CHANGED AND BENCHMARK PRICE TO FALL PROPERTY: MORE BANKS OFFER DISCOUNTS ON FIRST HOME MORTGAGES INTERNATIONAL EDITION CHINA POLICY WATCH, 20 MAR 2012 CURRENCY: RMB REFORM PROMOTED Stocks affected: HSBC, Standard Chartered, Major trading partners TRADE: CHINA MAY RELEASE MEASURE TO SUPPORT EXPORT IN APRIL Stocks affected: Consumer goods sector OIL & GAS: PETROL PRICES ADJUSTED, OIL PRICE BENCHMARK TO BE CHANGED AND BENCHMARK PRICE TO FALL Stocks affected: Maersk
CHINA POLICY FOCUS SHALE GAS SET TO REACH 20-30% OF GAS SUPPLY Gas Policy: Positive Outlook: Positive China's annual output of shale gas is expected to go from virtually nothing now to 6.5bn cu m in 2015 and at least 10 times that amount just five years later, helping China reduce its reliance on dirtier coal and cut its carbon emissions. MLR forecasts that the total investment in shale gas will reach 400- 600bn yuan over the next ten years….
Monthly Economic Policy
- Including sector performance
Financials
- Monetary policy
- Banks
- Insurance
Property Report
- Property prices & investment
- Affordable housing construction
Trade
- Exports & imports
- RMB and CNH market
Energy Sector
- Oil & gas
- Renewables
- Nuclear
Metals Sector
- Steel
- Copper
- Aluminium
Sector Reports
POLICY INVESTMENT MODEL: How policy makes a difference
- Identify sectors and annual targets according to China’s Five Year Plan
– eg: rail, roads, power generation, autos, rather than MSCI or FTSE sectors
- Use key sector targets as overall industry forecasts
– Monthly targets calculated for each sector based on 5-year previous seasonality (where applicable)
- Measure over or underperformance of actual vs target on a monthly basis
- Identify whether government policy is supportive, neutral or negative towards the sector
– Conclusion derived through in-house research in Beijing and contact with local policy advisors – Not just from a propaganda angle
- Assess relative sector performance to HSCEI on a monthly basis
- Use this in tandem with industry and policy positions to give investment outlook for each sector.
- 1. Industry Targets
- 2. Policy Outlook
- 3. Relative Performance
*Hedge return vs HSCEI assumes long/short positions have straightforward cash hedge position on HSCEI
Apr-13
May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-13 Mar-14 Apr-14 May-13 Jun-14 Jul-14 BUYS Construct Construct Construct Autos Autos Autos Water Water Water Insurance Insurance Insurance Property Property Property Steel Steel Steel Telco Eq Telco Eq Telco Eq Telco Eq Telco Eq Telco Eq Property Pharma Pharma Banks Insurance Insurance Insurance Construct Construct Construct Insurance Insurance Railways Pharma Gas Dist. Gas Dist. Copper Power Eq Gas Dist. Gas Dist. Gas Dist. Gas Dist. Gas Dist. Gas Dist. Water Water Water Telco Eq. Telco Eq. Telco Eq. p Small Bank Small Bank Small Bank Construct Construct Construct Aluminum Aluminum Aluminum
RESULT
- 0.49%
- 1.47%
- 5.18%
+1.60% +4.48% +2.73% +4.91% +11.64% +0.11% +1.64% +2.52%
- 3.28%
- 4.37%
+1.27% +4.06%
VS HSCEI
- 0.69%
+1.45% +6.97%
- 2.13%
2.76%
- 2.26%
+1.89% +3.98% +5.57% +10.86% +1.77%
- 5.14%
- 1.44%
- 3.54%
+3.23%
Vs MSCI CH
- 1.59%
- 0.19%
+3.77%
- 2.34%
2.11%
- 2.01%
+2.48% +6.79% +3.53% +8.20%
- 0.05%
- 1.55%
- 2.02%
- 2.76%
+2.52%
HEDGE RETURN vs HSCEI
- 0.37%
0.13% 1.12%
- 1.07%
+1.38%
- 1.13%
+0.95% +1.99% +2.79%
- 3.79%
+2.14%
- 2.18%
- 0.72%
- 1.77%
+1.61%
MEET & GREET: Insight from the horse’s mouth
Conference calls
Analysts and advisors in Beijing and London
Meeting in Beijing, China, Hong Kong and London
1-1s meetings with in-house analysts and key advisors
Previous events
CIC Supervisory Board Chairman, Mr Jin Liqun Talk in London and meetings with clients Director General NDRC Energy Research Institute Talk in London and meetings with clients Director General CBRC Seminar in Hong Kong and meetings with clients
Meeting advisors and analysts
- A key part of understanding China is speaking directly to those on the ground
- With the office in Beijing and contacts throughout China, we can provide insight to clients on key sectors and subjects
- Regular dialogues have been established with clients on agriculture, energy and financial market developments
Bespoke research
- Quick answers to provide interpretation or insight of particular topics are provided on a regular basis
- More in-depth reports and queries are answered through contact with key industry and government individuals and NSBO’s
analyst team Previous client questions
- Who are the main beneficiaries of the shale gas development in China? What is the government’s plan for gas infrastructure
and distribution?
- Will corn and other grain imports keep up their current pace or accelerate and what are the current reserve/state buying
levels?
- Is the Ministry of Railways going to be broken up and private/foreign capital allowed into the railway sector?
KEY DEBATES: Boom or Bust?
Property – Crashing or Coasting
Bear case: 1. Little demand and oversupply across China owing to
- verinvestment over the past 5-10 years.
2. House prices are unaffordable and monetary tightening is leading to lower investment in the sector. 3. String of defaults likely, leading to financial market instability and much lower GDP growth. Our view: 1. After the tightening until Q1 14, policy is being loosened again. 2. House purchase restrictions may be removed in Tier 2 & 3 cities, with government taking a hands-off approach to the sector. 3. Fundamental demand remains, particularly in Tier 1 & 2 cities, athough rebound muted by anti-corruption investigation.
Banks – Bust or Bullish
Bear case: 1. Banks face property, coal and steel loan defaults, with this tightening overall financing, liquidity and increasing risks. 2. NPLs set to rise throughout the system. 3. Greater competition from online/mobile funds and capital outflows leading to lower deposit growth. Our view: 1. Limited defaults will be allowed, but any systemic threat will be removed. 2. PBOC taking accommodative stance to promote stability, with net injections in Q2 continuing into Q3. 3. Banks see potential upside from greater bond issuance and some financial liberalisation.
Consumer – Rampant or Resistant
Bull case: 1. Incomes are rising 10-15% pa and China is in the ‘sweet spot’ of higher disposable income leading to greater consumer spending. 2. The government is pushing favourable consumer policies in order to increase consumption as % of GDP to over 40%. 3. Brand awareness and consumer culture is strong, leading to
- utperformance for global companies.
Our view: 1. The consumer still faces higher living costs from food, transport and housing that are not reflected in the numbers. 2. Incomes have risen more slowly than GDP for the past 5 years and are only now keeping pace, while deposit rates are 0 to negative. 3. Consumer policies face weak implementation.
Capital Account – Opening or Closing
Bull case: 1. China is reliant upon foreign capital for investment so will continue to open its markets to foreign companies and investors. 2. Greater reform is desired and necessary in order to even out imbalances both globally and domestically. Our view: 1. China faced capital outflows in 2012 but these are now returning
- wing to rebound in property sector.
2. China will increasingly use the RMB for both inward financial and direct investment to minimise exchange rate risk. 3. Reform under new administration is likely to be accelerated, with capital account opening being undertaken in tandem with exchange rate reform.
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