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David Fuller and Eoin Treacy's Comment of the Day
Category - China

Letting Foreign Investors Open Wholly Owned Hospitals Hardly a Cure-All

This article by Zhou Tian for Caixin may be of interest to subscribers. Here is a section: 

Liao Xinbo, an official with the health commission's Guangdong branch, said this amounts to granting foreign investors the same type of treatment as Chinese nationals when founding hospitals.

There is little doubt that foreign investors can bring advanced technologies and management expertise to the domestic health care industry, but we should not go so far as to celebrate the development as a solution to the problems of expensive drugs and the hardship many have experienced trying to find a good doctor.

In general, foreign-invested hospitals cater to wealthy patients. That means their services often cost a lot. It is unrealistic to hope that more foreign hospitals can make health care more affordable. By diverting wealthy patients away from ordinary hospitals, they might help with easing overcrowding.

But it is too soon to say whether foreign investors will line up for a hospital of their own now that restrictions on their share ownership have been lifted. Other authorities related to the opening of a hospital, such as those overseeing the sales of land and the health insurance and social security systems, must play along as well.

 



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Shanghai-Hong Kong Stock Connect : A big step towards greater market convergence

Thanks to a subscriber for this informative report from HSBC which may be of interest to subscribers. Here is a section:

This report, the third in a series about what Shanghai-Hong Kong Stock Connect means for different asset classes, analyses the implications and dynamics of this move towards market convergence for equities:

Short term: It’s initially about identifying price differences between A-shares and H-shares. Five months after the programme was announced, both markets are up 7-8%, and the Hang Seng China AH Premium Index, which tracks the average price difference for dual-listed companies, remains largely unchanged. However, across sectors there are significant differences between A-share and H-share prices. In general we believe this will lead to an investor preference for blue-chip companies in the A-share market and mid-cap growth companies in the Hong Kong market, which means the price difference should narrow gradually.

Medium term: The scheme should lead to substantially higher market turnover in Hong Kong and greater institutional participation in the A-share market. HSBC analyst York Pun estimates HKEx’s turnover could rise over 80% once all restrictions related to Stock Connect are removed. Similarly, we expect to see institutional investors, who currently own only 15% of the A-share market, become far more active in China. Foreign investors alone could drive up the level of institutional ownership of A-shares by at least 5-8ppts over the next 3-5 years through Stock Connect and existing channels such as the qualified investor schemes (QFII, RQFII).

Long term: We expect to see changes in the style of investment in both markets. The A-share market should move closer to Hong Kong – i.e. favouring value, large-cap and high dividend yield stocks – because of more foreign institutional participation, a lower risk-free rate and increasing dividend pay-outs. If we look at the net capital flow for both markets, defined as dividends paid by listed companies to shareholders minus the sum of equity fund raising plus stamp duty tax and stock trading commission, we find significant differences between Hong Kong and the A-share market. This is mainly driven by large-cap dividend yield stocks – the Hong Kong market recorded average positive cash flows of RMB130bn for the past three years, while the average for the A-share market was negative RMB65bn.



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China State Media Join Brokerages Saying Buy Equities

This article from Bloomberg News may be of interest to subscribers. Here is a section: 

China’s real-estate slump is spurring local investors to shift more of their money into stocks, according to Chen Xingdong, the chief China economist at BNP Paribas SA in Beijing. Signs of increased risk in wealth management and trust products may also make shares an attractive alternative, said Kathy Xu, a Hong Kong-based money manager at Aberdeen Asset Management Plc.

China’s new-home prices fell in July in almost all cities that the government tracks, according to the National Bureau of Statistics. At least 10 Chinese trusts struggled to meet payments in the three months through August, sparking protests by investors outside banks that distributed the products.

Equities comprised 4 percent of Chinese households’ total assets as of 2013, according to a June report from Credit Suisse. Bank deposits accounted for about 22 percent while property made up 55 percent.

The average annualized investment return on residential properties in China was 3.53 percent in July, down from 4.6 percent in June, according to Zhongjin Standard Data Research Ltd. in Hong Kong. The Shanghai Composite has an earnings yield of about 9 percent.

“You might even start to see retail money re-directed to equities after years of chasing real estate,” said Michael Shaoul, the New York-based chairman of Marketfield Asset Management LLC, which oversees about $18.5 billion.



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China Services Rebound in August Signals Economy Rebalancing

This article from Bloomberg News may be of interest to subscribers. Here is a section: 

Chinese stocks added to gains on optimism a rebound in services growth will help offset a pullback in manufacturing and a property slump. China’s weakening real-estate market has weighed on related industries, raising concern the government will miss its expansion target of about 7.5 percent this year.

“The economy still faces downside risks to growth in the second half of the year from the property sector slowdown,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement. “We think policy makers should use further easing measures to help support the recovery.”

August data point to divergent trends in employment across manufacturing and services, according to a statement from HSBC and Markit.



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Jack Ma Times Market Selling Second Alibaba IPO in Rally

This article by Kana Nishizawa for Bloomberg may be of interest to subscribers. Here is a section:

“The Chinese consumer space is probably a lot more exciting,” Liang said. “But I’m not saying this is going to be a skyrocketing IPO. The performance depends on the pricing. If it’s priced to perfection there will be little room left for after market appreciation.”

Alibaba may set its IPO value at $154 billion, or 22 percent below analyst valuations, in a move that could avoid repeating Facebook Inc.’s listing flop, according to the average estimate of five analysts surveyed by Bloomberg in July. The poll respondents saw Alibaba’s post-listing valuation at $198 billion. Ma owns 8.8 percent of the company.

 



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The Revived Bretton Woods System First Decade

Thanks to a subscriber for this fascinating report by Michael Dooley at UCSC, David Folkerts-Landau and Peter Gerber at Deutsche exploring the role of trade-offs between international capital and China’s reserve accumulation. Here is a section on India which may be relevant for the future: 

Recent developments outlined above suggest that India is not now on the path to replace China in the system. But looking forward, the Modi government’s plan, if implemented, would reload India into the periphery of a Bretton Woods II system. The 2014 election manifesto of the Bharatiya Janata Party announced several economic goals. A country intending to push an export-driven development policy could hardly describe its policies and goals differently. In sum, the manifesto seems aimed at vigorously implementing this strategy. The manifesto espouses: “A strong manufacturing sector will…create millions of jobs and increase incomes for the working class. Above all, it will increase the revenue for the government and lead to import substitution to bring down the import bill. We will make India a hub for cost-competitive labour-intensive mass manufacturing. (p. 29).”

Specifically, the manifesto proposes several policy goals to boost labor-intensive manufacturing. The current account deficit is to be reduced aggressively by focusing on exports and reducing the dependency on imports (italics ours). A program for ports, roads and rail to the interior, and airports is intended to facilitate international merchandise trade by eliminating severe infrastructural barriers. It also intends to eliminate the artificial bureaucratic barriers to commerce. FDI will be allowed in most sectors, except retail, and investment and industrial regions are to be set up as international manufacturing hubs. 

Of course, a political party’s manifesto is a wish list. Full implementation always collides with resource and political constraints. But taking it at face value means that India is readying itself to take up China’s role as the next large periphery in the Revived Bretton Woods system. As we said in Section IV, the key to managing the export-driven strategy at a global macroeconomic scale is the recruitment of FDI. The amount of collateral on hand limits FDI, but a large and persistent current account surplus relaxes the limit. In India, the government is now opening the doors to more FDI; and simultaneously, it intends to reduce the current account deficit. Our caveat is that it cannot expect a China-like attraction of FDI unless it can swing the current account into surplus. The manifesto seems to aim for these conditions, but this is a case of wait-and-see for this next test of the collateral hypothesis.



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Smart Grid in China

Thanks to a subscriber for this interesting report from Oriental Patron in Hong Kong. Here is a section:  

1. First of all, we believe energy savings investment will shift from industrial to public facilities, driven by urbanization in China which is the focus of China's smart grid development. As one of the central government's key aims, we expect the Energy Management (EM)'s market size to achieve 22% CAGR in 2012-2015E.

2. In light of this, leading Energy management contract (EMC) companies will enjoy fastest growth as subset of EM industry, at 39% CAGR in 2013-2015E, thanks to supporting government policies for EMC companies such as exemption on corporate tax, subsidies on building retrofit, etc.

3. We also expect the penetration of smart meters to increase rapidly from the current 60% in China to approaching 100%. Besides, we also see replacement demand kick in to drive 4.8% CAGR in 2013-2020E, starting in 2015E.

4. As smart meter penetration is likely to reach full coverage from 2014E onwards, we believe that smart meter suppliers with tailor-made power distribution and energy efficient solutions are able to leverage on the well-established smart meter network to offer value-added service, hence new revenue flow to support its robust earnings growth in the coming five years, we expect the earnings CAGR of Wasion Group (3393 HK) is 20% in 2013-2016E.

5. Ultra High Voltage (UHV) power cables demand CAGR 62% in 2015E-2020E, is much higher than CAGR 18% in 2010-2015E, thanks to National Energy Administration(NEA)’s plan for long distance power grid construction,

6. High entry barrier enable market consolidation. Nationwide UHV grid construction drives demand in EHV power cables construction in regional power distribution, only 12 manufacturers are qualified as suppliers to SGCC. 

 



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Tracking China's reforms

Thanks to a subscriber for this report from Deutsche Bank by Audrey Shi which may be of interest to subscribers. Here is a section:

China’s commitment to reforms continues to deepen, especially in regard to SOE reform. On 15 July, for example, SASAC named six SOEs to undergo pilot programs with respect to mixed-ownership (the greater involvement of private capital), the establishment of state-owned asset investment companies, reform of the board of directors system and disciplinary inspection reform. Various provincial governments (Jiangsu, Shandong, Gansu, Yunnan and Beijing) also recently issued SOE reform plans and over 15 local authorities have now announced reform guidance. At the company level, central SOEs including Chalco, China Everbright and Huarong, together with local SOEs such as Xinjiang Production and Construction Corp and Jiangxi Copper, published reform blueprints in July. In aggregate, all these developments represent a commitment to large-scale corporate restructuring, especially across SOEs.

Base on the principle of ‚differentiated management. revealed in 3rd Plenum Decision, we see various reform paths for SOEs: 1) Central pan-national SOEs in monopolized sectors (e.g. oil & gas, telecom and transportation) may allow private capital investments in minority stakes or in certain business units; 2) local SOEs (e.g. provincial level and below) in competitive sectors including F&B, apparel, electrics and healthcare, may be taken over by private investors in their entirety; 3) proceeds from the sale of competitive SOEs may be managed by the state-owned assets operation companies, which will channel more capital into utilities and strategic sectors; and 4) more SOEs assets may be listed or injected into listcos.

We expect this aggressive focus on SOE reforms to have a material impact on China’s longer-term economic outlook especially as the private sector is still significantly under-represented. Not only will these moves result in a substantial expansion in the private sector but the large-scale inclusion of private capital in current SOE sectors (both monopolies as well as competitive) will further promote the more efficient allocation of capital, result in further productivity gains and underpin longer-term growth.



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Better sentiment and flows, but little improvement in fundamentals

Thanks to a subscriber for this report from Deutsche Bank taking a cautious approach the recent move to outperformance by mainland Chinese indices. Here is a section:

We are often asked what would change our relatively bearish attitude towards the Chinese economy and equity market, to which our first answer is a credible proposal to reorganise the fiscal relationship between central and local government on a similar scale to what happened in 1994, but with the opposite impact, namely of increasing the revenue base of local government.

This is predicated on the belief that much of the sharp drop in China's productivity growth which has taken place in recent years derives from the reliance of local government on manufacturing industries for social/financial support. The resolution of the underlying fiscal issues around local government is also bound up with reforms to the current system of land ownership and the way in which the hukou or residency permits are granted. There have been some fairly strong statements from the finance minister Lou Jiwei since the start of 2014 that the authorities may be on the cusp of announcing a much clearer roadmap for fiscal reform, but so far nothing has emerged. Similarly there has also been a wave of speculation over the past couple of week concerning the possibility of a major liberalisation of the regulations concerning the system of granting hukous, but a clarifying statement has made it clear that any shift can only occur on a city-by-city basis. We will continue to scrutinise policy statements towards both fiscal and land issues very carefully, but so far Beijing appears to be continuing its recent tradition of talking up expectations, which are subsequently not backed by tangible measures. 

The anti-corruption campaign has also become an increasing area of focus for equity investors as it has been steadily increasing in intensity over recent weeks. The sharp rally in the price of Petrochina in particular, has been partly in response to the potential impact of the allegations of corruption made against senior figures at the company, in causing a re-evaluation of the capital expenditure programmes, which have been perceived as value destructive by minority investors. We are sceptical that there will be much in the way of change, since most of the big downstream projects which were undertaken within China and overseas appear to have reflected the strategic priorities of the Chinese state, priorities which are unlikely to change much over the near future.

 



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Email of the day on funds offering exposure to Chinese A-Shares

In yesterday’s message, you showed the big difference between China's A and B shares. Now from the charts, A-shares seem to offer the best opportunities, possible being at the beginning of a bull market. But I understand these are hard to get for foreign investors. Are there funds which are exposed to this market? (personally I own Aberdeen Global Asia Pacific)? Kind regards and thanks for your great daily work,



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