On 7-11 September Nordea Private Banking, Singapore, went on a road show to Thailand and China to meet its customer base and present valuable insights on a hot topic recently being on everyone’s lips: China.
Providing two different views on the topic ‘Is China a lost investment case?’ the expert speakers were Amy Yuan Zhuang, Senior Analyst at Nordea Markets in Singapore, and Christina Boutrup, corporate journalist and the author of the book ‘China Sweet & Sour’.
Bringing forward different angles, the two presentations were really informative and intriguing; giving the invited listeners an in-depth–perhaps for many slightly new–perspective on where China is heading. The senior analyst focused on portraying her assessment of the recent events, and gave her short to long-term forecast; while the journalist portrayed China’s growing global role and influence and how it is conducting business. The country is becoming a successful, international player with its home-grown brands and is increasing investment abroad with the capacity to beat any competition in terms of purchasing power
Will the bubble burst? Is China collapsing now? These are among the questions many investors have in2015 about the world’s largest economy (which China became in 2014). One thing was clear, based on the seminar expert: expect slowing growth rates in China for many decades to come!
“The long-term trend will not be about China’s growth–it’s going down for sure–but the question is how much it will be going down,” said Amy and predicted that its GDP will continue falling for the coming 40 years.
Why? Because of a falling labour force: in 30 years from now China will lack people! Also not efficient investment among companies is a concern for growth.
Aside these natural challenges the man-made ones are what to really worry about.
“Overcapacity and deflation, inventory overhang, and corporate debt overload. China is currently producing 20 per cent too much due to a state-planned economy.”
“And because Bejing has this growth target every year, the fear of sharp slowdown delays structural adjustment. The fear pushes them back to rely on ‘Old normal’,” explained Amy.
The ‘old normal’ is the old growth model in China.
“Actually, China has had two old growth models. The first old model was export-driven which characterised Chinese economy during 1980s – 2008. Then China moved on to the current growth model being investment-driven (and not export-driven). China has been talking about changing to a new normal (third growth model) towards consumption-driven but that has not yet happened.”
“When will bubble burst? Government will continue to rely on the ‘Old normal’, which supports a near-term soft landing. In the short term Beijing has enough policy tools, combined with housing market recovery to keep growth stable in the short term,” predicted the Nordea analyst.
“Medium-term risk is high because too much investment could make the investment less profitable and investment has to be financed by lots of bank lending, which is already very high and hence risky.”
“The credit-fuelled investment mania is getting worse! China has been pumping in a lot,” she warned. “How can China keep bubble running? Well the other countries couldn’t!”
Chinese corporations are heavily indebted.
The CNY devaluation, Amy explained as China’s attempt to kill two birds with one stone; achieving financial liberalisation at the same time as having a policy option of weakening the currency to stimulate export.”
Despite all the challenges Chinas is not a lost cause. A potential savour could be the OBOR One Belt, One Road project. The Made in China 2025 Plan with plans to promote innovation is positive and there are also investment opportunities for the long term, she thought.
“Find the New China, and don’t rely on Old China! New China is more consumption-driven and includes a larger service sector, while Old China is focused on infrastructure investment.”
Another way to see it is that in a way growth is going down because it’s unhealthy so they need to find a new model.
Christina Boutrup came with this angle as part of sharing further insights on how China is growing in importance the world over and that it can, despite a lot of mistrust, actually be seen as a serious player and partner. This was an eye-opener as well as confirmation of what we can all see happening around us, without always understanding.
Christina brought up Geely’s takeover as owners of Volvo Cars as example.
“Volvo’s management say they are very happy with Geely as owners and can blossom again as a Swedish economy,” she related from talking to them.
Yet, there is a lot of mistrust for Chinese investors to overcome, including a conspiracy surrounding China.
There is no secret agenda, it’s in their five-ear plan, said Christina.
“The Chinese government said: ‘Go out and by so China can claim the value chain!’ The new thing is to buy up technology and brands.”
She also explained that it is deeply rooted in China to imitate the best in the industry, to learn from the masters.
As a result brands from China are increasing very competitive – and innovative too.
“We can see Chinese brands that are very competitive; most are impossible to compete with. What can you then do? You are forced to enter alliances with Chinese companies.”
“So should we fear Chinese Investment? No, we have to get used it because it will explode. We’ll have to understand the Chinese system.”
“Volvo was just the beginning; we’ll see a lot of Chinese investment. We in Europe are like a buffet. Anyone can buy anything – there are no restrictions. Buy what you want!”
Christina gave French vineyards, of which some are getting new Chinese owners, as a concrete example: China is the top third wine producer in the world and they are learning from the west.
“In Europe it’s new to us to see all these Chinese, and we can see them now also in Copenhagen.”
Chinese investors have also begun coming to Scandinavian in much larger numbers and also started investing there.
There are also opportunities for Scandinavia in this. Within renewables and for example health care the Nordic region has a lot of knowhow and solutions that can be exported to China.
“In the future China will have 400 million people aged above 60 years old and they don’t have the health system needed for that. In Sweden they have private companies within this already and can start exporting.”
Chine loves to have such bilateral co-operations. Just be aware: for the Chinese the win-win opportunity means: ‘I beat you twice.’ They make sure they get a good deal out of it, said Christina.