Hangzhou Renaissance

During the Sung Dynasty (1127-1279) the capital of China was in Hangzhou (about 100 miles south west of today’s Shanghai). The famous West Lake remains one of China’s famous beauty spots.  Looking at the extraordinary variety and exuberance of the Sung ceramics, one can imagine the vitality and high level of Chinese civilization compared, for instance, to Anglo Saxon England in 1040 AD, when the capital was moved from Winchester to London.

Today’s Hangzhou is the headquarter to Alibaba, the world’s largest e-commerce business, of Geely Automobile, a leading Chinese domestic auto company, of Hangzhou Hikvision, a leader in surveillance and artificial intelligence, and many other technology leaders. Due to the rapid development of many new industries, Hangzhou was recently upgraded to a ‘Tier 1’ city in July of last year. The local property market is one of the most vibrant and high priced residential markets outside central Shenzhen, Beijing and Shanghai, with 9.5 million residents.  It gives the visitor a clear impression of today’s China – wealthy, confident, and assured with a pleasant clean lifestyle: Bentley, Ferrari, and Maserati all have prominent dealer show rooms: high-end restaurants are packed out for lunch and dinner.  Traffic is heavy but not choking as in the 2 major cities.

In fact, Hangzhou is in many ways comparable to Seattle (Washington), which is one of the fastest-growing cities in North America today owing to the presence of Amazon, as well as Microsoft, Boeing, Expedia, and so on. Amazon has 40 buildings downtown and over 50,000 IT employees.  Like Hangzhou, the city is being energized by the rapid growth and wealth creation of one major online company.

Everyone we spoke to in China was confident that the ‘Trade War’ will be resolved: even so, China can easily survive Trump’s threats and tariffs. Consumption is now 78% of GDP.  Exports are 18% of GDP, and exports to the US is 4% of GDP.  China’s ambitions to be a technology leader can hardly be suppressed.  As we have written before, they will innovate, and lead, in many areas, including medicine, biotech, AI, robotics, and so on.  It is not a threat to the west any more than Japan in 1980s, although the US demonises any economic competitor: in fact, global economic activity is thriving as the Asian giants engage, compete and improve efficiency.

In his fascinating book about Alibaba, Duncan Clark highlighted the strong nexus of small businesses which cluster in the province of Zhejiang in the city of Hangzhou. Alibaba has been able to leverage on this cluster of talent and products to the online e-commerce business which has really taken off in the 15 years since the outbreak of SARS in Hong Kong and China shut down a lot of physical shopping outlets.  Now the typical issue in America and Europe has become how far Amazon can be allowed to grow and destroy the old high street shopping outlets.  In China, it does not seems to be a big issue, but the question remains how far the ‘BATs’ (Baidu, Alibaba and Tencent) will be constrained by political authority just as the ‘FANGs’ (Facebook, Amazon, Netflix and Google) are now being constrained by new regulation, and some reaction in the case of Facebook, at their influence on the US electoral process (and Russian disinformation).

The Indian market has recovered in July, with the large cap index up 6% as the oil price corrected, and corporate results from Indian companies continue to be strong. In fact, in local currency, the Indian market has gained by nearly 8% since the end of last year, and is one of the best performing emerging markets.  The weakness of the Rupee has been the main drag on performance; but now that the Reserve Bank of India has hiked its policy rate by 25 basis points, we see the Rupee stabilizing.  Also we see major direct foreign investments in India by Samsung, Apple and, more recently, by J.P. Morgan.

The Indian market has also performed better in the last month, because it is not so badly affected by the trade tension between the US and China. In fact we have analysed the future situation of the assembly chains of technology and other products in Asia, and believe that South East Asia, India and its neighbours will benefit from a shift of manufacturing assembly work from China to India, Bangladesh, Vietnam, Thailand and perhaps Malaysia. Chinese capital is already moving into these areas.  We also notice that Samsung and Apple have both made major capital investments in Indian plants in the past several weeks.

Medium term, therefore, we believe that a balanced portfolio with China, India and ASEAN (Philippines, Malaysia, Singapore, Vietnam, Cambodia, Thailand and Indonesia) will be a very good portfolio to outperform in the next 10 years. It is interesting to observe that Pakistan has also elected its own home grown ‘Mr Modi’ in the shape of  Mr Imran Khan, the well-known cricketer and London socialite formerly married to Miss Jemima Goldsmith. He is likely to try and clean up corruption in Pakistan; and the Karachi market, and the Pakistan Rupee, have already rebounded by 4.7% in the first few days after the vote.  All of these countries in South Asia depend on China for capital investment and infrastructure improvement, so one of his first calls was on the Chinese Ambassador in Islamabad.

Our focus in our portfolios remain on the Asian consumer, now estimated to be 300 million in India and perhaps twice that figure in China (in ‘middle class’ consumers), and growing fast in Indonesia, the Philippines and other Asian countries; also on technology, e-commerce and other disruptive technologies and finally on the key sector in biotechnology and pharmaceuticals. The breakthroughs expected in oncology, by Chinese drug manufacturers, are extremely interesting and worth a diversified ‘punt’ on several promising new companies. The Hong Kong Stock Exchange has also relaxed its rules for new listings for biotech start-ups, and among the first names to list will be our favourite Chinese company, BeiGene.

Although we are now in the summer doldrums, we are looking forward to a strong and invigorating market bounce in the autumn, as the trade tariff war is resolved between Trump and NAFTA, and then Trump and China, as it has been between Trump and the EU. We are ready to buy into the A share market in China at a PE of 12 times, with earnings growth of over 20% in the pipeline, and local sentiment extremely depressed, even though the consumer spending and GDP numbers are coming in stronger than expected, at 6.7% for China, and over 4% for the US economy.  In conclusion, we do not believe that a trade war is imminent; and we are positive about prospects for China and the Oriental markets in the 4th quarter.

Robert Lloyd George
10 August 2018
Hong Kong