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International institutions recommend holding “Emerging China”

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2015-12-07 15:54

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The transition from “old” Chinese economy to the “new” one has been producing investment opportunities never seen before. To continuously invest in China in the future, investors have to throw off old concepts and seize new opportunities.

Hold “Emerging China”, better touching on it only lightly than none

Over the past few years, foreign investment banks such as Goldman Sachs are pessimistic about China’s economy most of the time. But in the latest report, the “new China” economic investment under “new normal”, the investment bank elaborated its recommendations of hold “emerging China” and disposal of “traditional China”. The transition from “old” Chinese economy to the “new” one has become the focus of international investment circle.

Specifically, Goldman Sachs singled out 671 Chinese enterprises as samples codenamed “new China”, which are different from “traditional China” represented by other Chinese enterprises. “New China” enterprises cover 30 areas, such as satellite cable, ecommerce and education. In comparison with "traditional China", the proportion of health care, science and technology industry significantly increased

Traditionally, investors judge the Chinese economy according to purchasing management index (PMI), industrial added value and other indicators. Goldman Sachs believes that though these indicators can of course be able to reflect the status of the industrial and manufacturing sector, but with the rise of consumption and other sectors, they have been unable to fully reflect the whole picture of the Chinese economy.

Goldman Sachs analyzed in the report that over the past 30 years, Chinese economy has maintained an average growth rate of 10 percent, which is primarily benefit from cost competitiveness, dividend of reform and strong government leadership. However, this growth pattern has reached the cap now. “Even though the Chinese economy is slowing down, but industries such as technology, new energy, education, media and entertainment still outperformed traditional economic engines, namely ‘traditional China’ ”.

A group of 20 “Emerging China” stocks tracked by Goldman Sachs has realized 23 percent earnings during the first half 2015, the new high since 2010. It also means that “Emerging China” is less sensitive than “traditional China” with respect to macroeconomic slowdown. “Among the most preferable stocks in ‘traditional China’ concept, the growth of earnings in the first half of 2015 is just 2 percent,” said Kinger Lau, chief China strategist at Goldman Sachs.

Coincidentally, according to the Morgan Stanley Capital International China Index (MSCI China Index), stark contrast between the consumer discretionary, healthcare and IT sectors, and energy, materials and industrial sectors showed China's "new economy" performance to be far more than the "old economy." As in the third quarter of 2015, the annual revenue of the former three grew by 22%, 15% and 20% year on year, respectively, while the latter three fell by 32%, 1% and 16% year on year, respectively.

“iResearch released China Top200 Unicorn Companies List lately, and I discovered that 80 percent of these companies are set up in 2009 and 2010 or later ”, said Qinshuo, the founder of Business Civilization Alliance and the promoter of Chin@Moments, adding that “from internet to robot, drone, animation, O2O, big health, 3D printing ,etc., they are neither included in government plan, nor did they borrow lots of bank loans, but we seldom hear them complaining about inadequate policy support or that the market is saturated ”.

As the investment circle pays closer attention to “Emerging China”, non-Chinese companies expected to benefit from China’s economic evolution also embrace good news. Nike, the U.S company which benefit from China’s “sports fervor”, Amore Pacific, the South Korean cosmetic company which benefit from China’s “beauty fervor” and even LAOX ,the time-honored Japanese electric appliance chain which benefit from China’s “”toilet lid fervor” and “electric cooker fervor” , all gained attention from investors.

In contrast, companies with even slight relation to “traditional China” are impacted. Glencore, the Switzerland based commodity trader dually listed in London and Hong Kong is a typical example. Earlier on Sept. 29, the commodity giant experienced steep fall of about 30 percent, the biggest drop in its history, which caused the commodity version of “Lehman moment panic”. Meanwhile, the international rating institution S&P indicated earlier that Noble Group, another commodity trader, may be downgraded; Moody also indicated that the company may lose its investment grade rating. Behind the dismal situation of these companies is easing demand results from China’s slowdown in capacity absorption and economic growth, which triggered investment risks on these companies.

Who can represent “Emerging China”?

“Recent data on commodity consumption showed that China is shifting to a consumption led economy,” said Hu Yifan, China chief economist at the office of investment director of UBS Wealth Management. He added that China’s economy will rely more on high-end manufacturing, and “Emerging China” will emerge soon. Fiscal and monetary policies will play key roles during the process of economic transformation.

Zhao Yang, chief economist of Nomura Research Institute, said in the exclusive interview of China Business News that “growth rate of China’s economy will continue to gradually slow down to a sustainable level of medium or high speed in ten years, and consumption rate (consumption proportion in the GDP) will increase during this process to become an important macro structure to adjust the trend, which is mainly based on slowing-down of China’s fixed-asset investment.” He indicated that China’s consumption rate is around 52 percent, which is low and rare when compared to the average level in the world of 75 percent; therefore, there is still a huge potential for uptrend, which will be a process to boost the innovation”.

China’s economy now starts to change, but the investors also need to change their concept in the following period. Ning Jing said that it is very important to recognize that economic pattern based on consumption is coming, “which will bring more efficient and transparent economy”.

Chen Minlan, APAC investment director of Investment Director Office under UBS Wealth Management Co., Ltd., stated that “investors could focus on new economic industries in 2016 and in the future”, China’s economic transformation to which the market is looking forward may be finally stepping into the track, and the fixed-asset investment based economy is transformed to that lead by local consumption. But investors are wondering which one is the “new economy”, and who can represent the sectors of “emerging China”.

Liu Jinjin once told the China Business News that traditional industries and blue-chip stocks of Shanghai Stock Exchange are more capable to represent the “old economy”, and those of Shenzhen Stock Exchange are more related to elements of the “new economy”, such as science, technology and medical treatment, if we roughly divide the “old and new economies”. According to previous reports, 671 listed companies have been selected as reference by Goldman Sachs among 143 industries and 3,636 companies to track the sectors of “emerging China”. The proportions of industries, including health, medical treatment and science & technology, in the “emerging China” greatly increase to over 60 percent, which is obviously different from those of “traditional China”.

Ning Jing said, “I still like industries of ‘alterative consumption’, especially the enterprises which benefit from structural demand growth aroused by urbanization; and ‘alterative consumption’ is also a channel to invest the industries of ‘emerging China’.”

However, there is no standard answer during the investment. Hu Weijun believed that sectors of “emerging China” have larger development potential, but based on investment, their performance is not certainly better than that of “traditional China”; and periodicity of the new economy is not strong, it can reach the investment target when the economy is stable and steady, in other word, when the up/downtrend pressure is not greatly intensified.

Government to support industries of “emerging China”

Sheng Laiyun, spokesman of National Bureau of Statistics (NBS), recently indicated when he answered the questions of China Business News that developing gap between the old and new industries are enlarging based on detailed industrial data, traditional industries with surplus capacity face increasingly-intensified pressure on development, but emerging industries are developing with a rapid speed exceeding the expectation.

Currently, China’s third industries contribute to over 50 percent of GDP, and consumption still maintains a stable and rapid growth under the background of weak investment and foreign trade. In addition, high-end equipment industry enters into the developing countries, such as Brazil and Thailand, but also carries out close cooperation with developed countries, including the USA and UK. Meanwhile, China’s high precision technologies, like unmanned aerial vehicle and robot, develop very fast, arousing a wave of transformation from “Made in China” to “Intelligent Manufacturing of China”.

Although sectors of “emerging China” have huge potentials, they are still at a preliminary stage of development. Staff in National Development and Reform Commission (NDRC) told the journalist that current emerging industries have not formed as the leading role yet, with frequently-changed driving forces; on the whole, there is still space for uptrend forces, but it requires efforts made in the new and old aspects; we should focus on transformation and upgrading for the industries of “traditional China”, and strive for time and space for transformation of China’s economic drives, while accelerating the development of the sectors of “emerging China”.

The NBS data shows that, under the background that China’s economy is entering into a new normal status, enterprises of different industries, regions and scales have greatly-diversified performances. Industries based on resources, with surplus capacities or with high pollution suffer great pressure from downtrend, but sectors related to “emerging China”, especially the emerging industries under national strategies achieve favorable performances. At the same time, China is at a rough stage of transformation from old drives to new drives, with old ones fading away and new ones still in cultivation and growth, therefore, it is easy to see difficulties against economic growth.

In order to realize the connection between new and old drives, recent policy deployment of the government has obvious orientation, for example, creating a strategy of pervasive business start-up and innovation, adding public products and services, enhancing activities and plans for “Internet +”, implementing the strategy of “Made in China 2025”, boosting the “go out” of equipment for its cooperation with international capacity, developing the service industry as powerful measures for stable growth and structural adjustment, which can all release huge domestic demands. Meanwhile, the State Council stresses accelerating the implementation of policies and projects to add investment in weak sectors, improve the mix of innovation and business start-up, and develop new driving forces.

It is worthy to notice that development based on five concepts including innovation will be showed more in macro adjustment & control, after suggestions on “13th Five-year Plan” was issued. The said NDRC staff also mentioned that the government will provide a platform and solve the problems to make the market further play a decisive role, which is a keynote for policies formulation in the future period.

Translated by Jelly Yi and Adam Zhang

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