Show Transcript
China has just rolled in the Year of the Ox, and it sure looks like the bulls are running in the Shanghai market. Will Chinese equities continue to outpace those in the S&P 500? Kim Parlee talks to Haining Zha, Vice President and Portfolio Manager, TD Asset Management, about the outlook for China.
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[MUSIC PLAYING]
- Haining, thanks so much for joining us. Let's just start what do you mean by a bull-headed bear?
- Well, let me give you a set of numbers. So if you look-- if you follow the commonly used benchmark, for example, CSI 300, the year-to-date return is more than 10%, which is fantastic. But actually, if you're looking at the median return of the 4,000 companies listed in China, that return year-to-date has been negative 10%. Actually, three quarters of the company has posted negative or flat return year-to-date.
So the index is really concentrated in a handful of names.
- What is happening? Because I know that there's some interesting things going on with the Chinese market, and this idea of creative destruction, as the government is taking a look, to lift the hood, if you will, in some of these companies. Maybe that's part of the reason we're seeing those returns?
- Right. That's what we call creative destruction. So on the creative side, there is some rule changes regarding the IPO process, has changed from approval-based to a registration-based system, which means the regulators are handing the pricing and risk assessment of the IPO deals back to the market forces, which allowed more company to go public. And in last year, about 400 companies were listed, and they are raising 470 billion RMB throughout the year, which ranks number one globally.
And on the destruction side, as the regulators tighten up the delisting rules and enhance their information disclosure standard, more than 20 companies got delisted last year. So you can see the end result is the good companies are flowing to the market and bad companies are kicked out of the market. So the capital allocation process become much more efficient.
And over time, this is very beneficial to capital markets.
- And it certainly makes it busy for active managers, I'm sure, who are trying to figure out which are the good ones and which ones are going to be delisted.
Let me ask you a bit about Hong Kong and the Hang Seng. My understanding of that index has also been booming, which is a bit surprising, given the tensions we've seen between Hong Kong and China.
- Right, but overall, I would say the impact in terms of capital flow has been marginal. Actually, year-to-date, if you look at foreign investor capital outflow, it's been around $150 billion Hong Kong dollars also. But is completely offset by the southbound capital inflow from mainland investors.
And one of the key reason is that the structure of the Hong Kong market has completely changed. 10 years ago, it was dominated by state-owned energy or financial companies, like PetroChina, ICBC. But today if you look at the top market cap, it's basically dominated by tech names like Alibaba and Tencent. So as the Hong Kong stock exchanges reform their exchange rule, more and more tech, consumer, and health care companies are getting listed in Hong Kong.
So if you are investors looking for exposure to some secular technology trends or a rising middle class consumption, then Hong Kong is the market you cannot miss.
Hm. Fascinating. What about just the overall economic cycle? I mean, China, obviously, is ahead of the curve-- I don't know if that's the right terminology, but they're earlier in the cycle, I'll say, when it comes to COVID-19. They were in it earlier. They are coming out of it earlier. But if I'm not mistaken, they are of the only economies, really, to avoid a contraction because of COVID-19. So what's the outlook?
- Right. I think people increasingly are worried about the so-called exit strategy of various policy stimulus. And we have to separate it into fiscal and monetary. So in terms of fiscal policy, China's fiscal package is never that big in the first place. So in aggregate terms, it's probably around 6% to 7% of GDP. And there is no direct handing out of government checks to the household. Compared to the US, which is around 15% of GDP last year and is still coming.
So I think this year, benefiting from the business recovery, the government revenue has already recovered quite a bit. And on the spending side, because the central government want to control the local government credit, so I guess this year it will probably be marginally cut.
And in terms of monetary policy, people worried about going forward, as the economy can't already stand up to its own feet, the central bank will gradually tighten up the policy, which exert valuation pressure on the equity market. But overall, we don't think that's a big concern because central bank has made it abundantly clear that they will make a very gradual turn, and it won't be very sharp.
And in our opinion, the monetary environment in China has already tightened. So if you look at the short end of the Chinese curve, the Chinese two-year government bond yield has already risen by about 150 basis points also, completely going back to the level before the COVID-19 shock. Whereas, compared to the US, the US two-year is still well anchored around zero, signaling a prolonged policy easing.
- Haining, I've only got about a minute. I need to squeeze in-- I need to ask you. I mean, with all the investment in on the green side, and also just your outlook for opportunities, what are you seeing as someone who manages right now in China? Where are the opportunities?
- Yeah, I think the opportunity is tremendous. China has already made it clear that it will reach peak CO2 emission by 2030 and reach carbon neutral by 2060. And if you take two of the major renewable energy sources, wind and solar, right now their total capacity is about 500 gigawatt. And according to government plan it will at least reach 1,200 gigawatt in 10 years, which is double the amount.
Another example is new energy vehicle. Right now, it is only less than 2% of the total fleet, and its annual sales just topped 1.1 million unit, which is only 5% of the total sales. But the target is, by 2025 it will reach 20% of the total sales. Again, it's fourfold increase in five years. So we see tremendous opportunity, and equity market is certainly very quick in pricing that prospect. And year-to-date, we see new energy vehicle basket rallied about 16% and solar basket rallied about 20%. And we think it's just the beginning of a long-term trend.
Haining, we're going to have to leave it there, but it's always a pleasure. Thanks so much for joining us.
- My pleasure.
[MUSIC PLAYING]
- Haining, thanks so much for joining us. Let's just start what do you mean by a bull-headed bear?
- Well, let me give you a set of numbers. So if you look-- if you follow the commonly used benchmark, for example, CSI 300, the year-to-date return is more than 10%, which is fantastic. But actually, if you're looking at the median return of the 4,000 companies listed in China, that return year-to-date has been negative 10%. Actually, three quarters of the company has posted negative or flat return year-to-date.
So the index is really concentrated in a handful of names.
- What is happening? Because I know that there's some interesting things going on with the Chinese market, and this idea of creative destruction, as the government is taking a look, to lift the hood, if you will, in some of these companies. Maybe that's part of the reason we're seeing those returns?
- Right. That's what we call creative destruction. So on the creative side, there is some rule changes regarding the IPO process, has changed from approval-based to a registration-based system, which means the regulators are handing the pricing and risk assessment of the IPO deals back to the market forces, which allowed more company to go public. And in last year, about 400 companies were listed, and they are raising 470 billion RMB throughout the year, which ranks number one globally.
And on the destruction side, as the regulators tighten up the delisting rules and enhance their information disclosure standard, more than 20 companies got delisted last year. So you can see the end result is the good companies are flowing to the market and bad companies are kicked out of the market. So the capital allocation process become much more efficient.
And over time, this is very beneficial to capital markets.
- And it certainly makes it busy for active managers, I'm sure, who are trying to figure out which are the good ones and which ones are going to be delisted.
Let me ask you a bit about Hong Kong and the Hang Seng. My understanding of that index has also been booming, which is a bit surprising, given the tensions we've seen between Hong Kong and China.
- Right, but overall, I would say the impact in terms of capital flow has been marginal. Actually, year-to-date, if you look at foreign investor capital outflow, it's been around $150 billion Hong Kong dollars also. But is completely offset by the southbound capital inflow from mainland investors.
And one of the key reason is that the structure of the Hong Kong market has completely changed. 10 years ago, it was dominated by state-owned energy or financial companies, like PetroChina, ICBC. But today if you look at the top market cap, it's basically dominated by tech names like Alibaba and Tencent. So as the Hong Kong stock exchanges reform their exchange rule, more and more tech, consumer, and health care companies are getting listed in Hong Kong.
So if you are investors looking for exposure to some secular technology trends or a rising middle class consumption, then Hong Kong is the market you cannot miss.
Hm. Fascinating. What about just the overall economic cycle? I mean, China, obviously, is ahead of the curve-- I don't know if that's the right terminology, but they're earlier in the cycle, I'll say, when it comes to COVID-19. They were in it earlier. They are coming out of it earlier. But if I'm not mistaken, they are of the only economies, really, to avoid a contraction because of COVID-19. So what's the outlook?
- Right. I think people increasingly are worried about the so-called exit strategy of various policy stimulus. And we have to separate it into fiscal and monetary. So in terms of fiscal policy, China's fiscal package is never that big in the first place. So in aggregate terms, it's probably around 6% to 7% of GDP. And there is no direct handing out of government checks to the household. Compared to the US, which is around 15% of GDP last year and is still coming.
So I think this year, benefiting from the business recovery, the government revenue has already recovered quite a bit. And on the spending side, because the central government want to control the local government credit, so I guess this year it will probably be marginally cut.
And in terms of monetary policy, people worried about going forward, as the economy can't already stand up to its own feet, the central bank will gradually tighten up the policy, which exert valuation pressure on the equity market. But overall, we don't think that's a big concern because central bank has made it abundantly clear that they will make a very gradual turn, and it won't be very sharp.
And in our opinion, the monetary environment in China has already tightened. So if you look at the short end of the Chinese curve, the Chinese two-year government bond yield has already risen by about 150 basis points also, completely going back to the level before the COVID-19 shock. Whereas, compared to the US, the US two-year is still well anchored around zero, signaling a prolonged policy easing.
- Haining, I've only got about a minute. I need to squeeze in-- I need to ask you. I mean, with all the investment in on the green side, and also just your outlook for opportunities, what are you seeing as someone who manages right now in China? Where are the opportunities?
- Yeah, I think the opportunity is tremendous. China has already made it clear that it will reach peak CO2 emission by 2030 and reach carbon neutral by 2060. And if you take two of the major renewable energy sources, wind and solar, right now their total capacity is about 500 gigawatt. And according to government plan it will at least reach 1,200 gigawatt in 10 years, which is double the amount.
Another example is new energy vehicle. Right now, it is only less than 2% of the total fleet, and its annual sales just topped 1.1 million unit, which is only 5% of the total sales. But the target is, by 2025 it will reach 20% of the total sales. Again, it's fourfold increase in five years. So we see tremendous opportunity, and equity market is certainly very quick in pricing that prospect. And year-to-date, we see new energy vehicle basket rallied about 16% and solar basket rallied about 20%. And we think it's just the beginning of a long-term trend.
Haining, we're going to have to leave it there, but it's always a pleasure. Thanks so much for joining us.
- My pleasure.
[MUSIC PLAYING]
