On Wednesday 3 October 2018, Aberdeen Standard Investments held a presentation on the Chinese Market at the Sofitel Le Grand Ducal in Luxembourg-gare.
In 2018, China is shifting its economic growth focus, from a “quantity” to “quality” driven approach. This seismic change has huge implications on the financial markets and raises key questions. Aberdeen Standard Investments’ experts zoomed in on key topics currently driving the Chinese market and discussed the outlook of the world’s second largest economy.
The labour market is shrinking in China and its population is aging, therefore the revised approach to the country's economy.
Phil Barker, Head of EMEA Distribution at Aberdeen Standard Investments, explained the merger of Aberdeen Investments and Standard Life which merged on 24 August last year, and the importance of Luxembourg in sales and administration. He addressed active management and corporate social responsibility which operate throughout the organisation and across asset classes.
Adam McCabe, Head of Asian Fixed Income, said that the company was one of the first foreign asset managers active in China, and also manages money for onshore investors since the beginning of this year. He said that China presents great opportunities in relation to asset optimisation. Foreigners can now obtain access to domestic markets more than previously, with the diversity that the Chinese bond - the second largest in the world - market brings, following opening of the market by Chinese regulators. China will represent 5-10% on bond indices before long.
He expects a weight of 7% in the next few years. The level of foreign ownership of Chinese binds is growing, with 4.5-5% at present. This brings diversity as it has a low correlation with most other markets around the world. The rates in China will be higher than in most of the developed world. Currency volatility is low.
China's influence in global policy-making has increased dramatically. China appears to be relatively relaxed concerning trade tension as their infrastructure development and policy reform have led to less dependence on exports and less dependence on the US - the Chinese economy is much more resilient than it once was.
He talked about having sufficient liquidity in the system - the Chinese government is ensuring that there is confidence in the banking system and in the economy by applying a targeted approach to liquidity and credit growth to the top four banks. He issued a word of warning about getting sucked into markets where there are reforms currently underway, and protectionism. The government is aware of these and is addressing income tax cuts and reductions in VAT rates. China is providing support for the domestic economy which provides stability and is responsible.
On balance, markets are opening (in China), but which are faced with challenges. The risk profile is different, but is difficult to ignore.
Nicholas Yeo, Director & Head of Equities, Asia, talked about equities funds in Asia, including the China Onshore Bond Fund and the China Asia Fund. Aberdeen Standard has a number of teams across the region, including a team of 15 in Singapore who provide support to the fund managers, and a new presence in Shanghai with expansion in Hong Kong too.
The focus is to find companies with good track records and strong cash flows, with governance the most important criteria for consideration in the next evaluation. The service sector represents more than 50% of GDP growth at the present, with the biggest driver being Millennials, the premium consuming class, currently 68 million in China.
He addressed the A-share market, with the domestic market being retail- and sentiment-driven. Onshore company growth is robust with 15% expected over the next couple of years. He advised to go active rather than passive in these markets with scope for the alpha generation being very high. More companies are becoming more international, many by acquisition, and want to attract more international shareholders - normally local fund managers have short-term views, with foreign shareholders being more long-term and attracted by proper governance.
He mentioned Aberdeen Standard Investments going after companies in the insurance and healthcare sectors, with many of the companies "sitting on cash" by having strong business models.