Emerging Markets

Give China A Break - It's Becoming A Better Place For Business - Matthews Asia

Chrissy Coleman Asia Correspondent 15 January 2013

Give China A Break - It's Becoming A Better Place For Business - Matthews Asia

Stop criticising China, said Matthews Asia, the largest dedicated Asia investment specialist based in the US. Contrary to popular belief, China is actually moving forward progressively with reforms, the chief investment officer says.

Robert Horrocks, CIO, Matthews Asia, in a report challenged a long list of complaints against the minland, including the fact that the economy is state-controlled; it never innovates; its banks are inefficient; and wages are rising.  Matthews Asia had $19.2 billion in assets under management 31 October 2012.

“It’s easy to focus on China’s problems but the Chinese are focusing on the solutions. In my mind, China is a source of change, vibrancy and evolution. Considering China’s 10x forward 12 months earnings, a 2.5 per cent dividend yield and nominal GDP growth of approximately 10 per cent as of mid-December, I am happy to hold this contrarian view,” Horrocks said.

In view of a recent PwC and Chinese Banking Association survey (The Chinese Bankers Survey 2012), that said 80 per cent of Chinese wealth managers strongly favour business expansion, a progressive view of China provides an ideal backdrop to support the growth of the industry.

Growing Private Sector

According to Horrocks, China’s fundamental story of the past few decades has been of government making room for the private sector to flourish. He illustrated his point through an observation he made as a student in Beijing in the 1980s.

“I saw numerous factories all churning out the same goods - Mao suits, Mao hats and police uniforms. The lack of competition or profit motive was obvious. But I also remember the kiosk at my university, run by an elderly woman who sold beer and cigarettes. For a few dollars, you could buy her entire stock of mouldy beer. In a state-run economy with no personal incentives, nothing would ever change. But even back then, this vendor, who was old enough to remember what capitalism used to be like, was not going to let the opportunity of thirsty British students slip by," he wrote.

"Progressively, she stocked less mouldy beers until she was selling Singaporean, Japanese, American and Irish household brands by the end of the academic year. To this day, I recall this story to remind me of how quickly things can change.  I also remember that selling to foreigners was a means to an end and not the end in itself. Exports were not the goal of China’s economic growth, they were the means by which China would re-learn capitalism,” his note continued.

Horrocks said corruption is a continuing issue in China. However, he said the state has cut its direct influence on the economy, making China an easier place to do business, and helping it rank higher than countries like Russia, Brazil or Argentina.

Hong Kong, which publicly lists most of the “China” companies US investors invest in, is the world's freest economy and also ranks the second-easiest for conducting business (behind Singapore). China’s government spends about 21 per cent of GDP, compared to 39 per cent in the US and even more by European governments. In addition, a survey of entrepreneurship concluded that perceived opportunities in China were greater than in the US and Europe. In China today, small and medium enterprises account for 80 per cent of urban employment, and China has become a champion of the entrepreneur, said Horrocks.

Rising wages

Dismissing concerns about the “death of the low-wage economy”, Horrocks emphasised the positive outcomes of this development: “Now, China can attract high wage earners for senior positions in some of its largest enterprises as it seeks to lure expertise into the economy to continue its modernisation, productivity growth, and, yes, raise wages. In the sphere of productivity growth, China is acting as a role model for the entire region.”

Horrocks said China, known for its “copy-cat” approach to innovation, must embrace new technology. However, he argued that the Chinese don’t create value simply through adopting new technologies, but add their own value by learning about the products, manufacturing processes, logistics, marketing and financing techniques that other economies have already refined.

As a sign of developments are changing, WIPO (World Intellectual Property Organization), found that China now is the world's biggest producer of patents for new inventions, having overtaken the US. (In recent years, there have been widespread accusations from the West that Chinese firms steal Western firms' ideas.)

“I care less about who developed the technology than I do about how a business uses it to maintain a competitive advantage. I expect China to employ more information technology in the future to boost productivity. Between 1985 and 2000, IT investment added on average 0.1 per cent to China's annual GDP growth, compared to 0.6 per cent in the US; between 2000 and 2010, IT added 0.6 per cent annually to Chinese growth compared to 0.5 per cent in the US, “ said Horrocks.


People have criticised China’s banks and rightly so, Horrocks said, noting that government-directed lending is inefficient and nonperforming loans are likely rising. However, while in the late 1990s China’s nonperforming loans were estimated at 40 per cent of GDP, China’s economy grew at nearly 20 per cent annually between 2000 and 2010.

Additionally, while there are reasons to be cautious about unregulated lending, Horrocks said, that when he speaks with companies that use informal lending, he finds that they may be paying 15 to 18 per cent interest rates, suggesting that they are in fact pricing risk more appropriately, contrary to frequent criticisms.

China leads Horrocks to feel positive about the rest of the region too - poorer Asian nations benefit from the impact of greater trade, wealthier Chinese consumers and outsourcing certain operations from China to them, which in turn boosts local economies. Less developed countries in Asia are also learning about the importance of a stable political environment, observing China’s shift from revolutionary upheaval to smooth transition of power, Horrocks said.



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