Pollution levels are down, energy companies are recovering and government reforms are having an impact. China is in good health and can expect even better to come as fintech takes hold, says Investec Asset Management's Joanna Yang.
I was recently on a business trip to China, and visited Shanghai, Macau and Beijing to attend investment conferences and company meetings.
I have been to Beijing many times and I always come back having had a unique experience. The most significant change I noticed compared with my previous trips was the blue sky, which tells me that air quality has improved and the environmental controls implemented by the government are working.
The overall mood among the many investors and company executives I met was very upbeat. Although there was still concern about the elevated debt situation in China, there has been a noticeable improvement in the state of the economy. Growth has been better than expected, for example.
I met with a wide range of companies to get a good perspective on the Chinese economy, including A-share listed companies. More importantly, I met with those that benefit from the state-owned enterprises (SOE) reforms and the consumer consumption upgrades, which have been at the heart of our investment themes over the past 12 months.
Companies such as Baosteel and Shenhua Energy have been suffering from overcapacity over the past few years, but capacity reduction initiated by the government has allowed commodity pricing to recover, driving better than expected revenue and earnings growth for these companies.
Reforms related to management incentive programs and shareholder return policies are also driving fundamental changes in how we evaluate these companies.
On the other hand, middle-class consumption is on the rise, and companies such as Midea, Galaxy Entertainment and New Oriental Education are seeing strong demand growth. Consumers are willing to spend more on quality products and services, as well as entertainment.
Water cooler chat
There was plenty of discussion of technological innovations such as artificial intelligence and virtual reality. Conversations also centered on the SOE reform, particularly on mixed ownership and capacity reduction.
In Macau, the rise of the middle class and the building up of technological infrastructure have been key drivers for growth in its gaming sector. A lot of capital has already been spent and the gaming companies in Macau are enjoying the operational leverage coming from stronger visitation growth and increased spending power.
One of the main things to come out of this trip was my discovery that new opportunities in how companies address their technological needs stand to revolutionize.
China’s financial services sector. We have seen a lot of investment in new technological platforms that could disrupt traditional financial services companies. It will be interesting to see how this evolves. Government policies have gradually become more shareholder-friendly.
A reversal of this trend or furthermarket manipulation would be counterproductive and would have an impact on our investment thesis.
More broadly, the economy is powered by large numbers of motivated and entrepreneurial individuals. Many of them are highly educated and have experience of working around the world, especially in the technology sector, where we see a lot of innovation.
The public sector is also becoming more shareholder-friendly. What we perceived as a struggling old economy is now focusing on operational efficiency and repairing balance sheets. We believe more investment will be diverted back to China as investors’ confidence returns.