China
China’s Trade With Emerging Markets is Surging
A recent article in the Bloomberg BusinessWeek magazine titled There’s a New Silk Road, and It Doesn’t Lead to the U.S. discussed the growing trade ties between emerging markets.
From the article:
“As the U.S. emerges from the recession, American investors often wonder where the growth is going to come from. Perhaps they should talk to Ruben Bisi, international operations director for Marcopolo, Brazil’s biggest bus maker. It’s having a banner year, with revenue up 47 percent so far. You won’t see Marcopolo buses in the U.S., though. They’re cruising the highways and city streets of Argentina, Colombia, Mexico, Egypt, India, China, and South Africa. Brazilians often have a better relationship with these customers than big multinationals do, says Bisi. “We are from an underdeveloped country as well,” he explains. Almost 40 percent of Marcopolo’s sales of $1.1 billion come from outside Brazil: It sold 460 buses to South Africa for the World Cup.
Marcopolo is a traveler on what Stephen King, chief economist of HSBC (HBC), has dubbed “the new Silk Road”—a 21st-century version of the trade routes that crisscrossed Asia almost 2,000 years ago, linking merchants in China to their counterparts in India, Arabia, and the Roman Empire. The new Silk Road spans the globe, connecting companies and consumers in Latin America, the Mideast, Asia, and Africa, and generating some $2.8 trillion in trade, according to the World Trade Organization.
King says emerging markets will grow about three times faster than rich nations this year and next. “There are now massive trade connections within the emerging markets,” he says. “It means in one sense the emerging world is protected from the worst ravages of the developed world.” The WTO estimates intra-emerging-market trade rose, on average, by 18 percent per year from 2000 to 2008, faster than commerce grew between emerging and advanced nations.”
On the rising influence of Chinese firms in developing markets, the piece noted:
“While the U.S. and other developed countries hope to find their place on the Silk Road, the central player is China. Chinese exports to the emerging world accounted for about 9.5 percent of its gross domestic product in 2008, compared with 2 percent in 1985, King figures. Last month the Saudi Railways Organization awarded a contract to China South Locomotive & Rolling Stock to supply 10 locomotives. The Mecca-Medina rail contract went to Beijing-based China Railway Group (CRWOF). Shenzhen-based Huawei Technologies, China’s top maker of phone equipment, is investing $500 million in its research center in Bangalore. China Mobile, the world’s biggest phone carrier, may soon invest in Africa.”
As the U.S. and developed world economies remain sluggish, trade volume between China and emerging markets is rising at a staggering pace. In July, trade volume which includes exports and imports with foreign countries rose 40.9% compared to the same period last year. However China’s trade with emerging markets were much higher as noted in the examples below:
- Trade between China and ASEAN countries rose by 49.6%
- Trade between China and Malaysia, Indonesia increased by 60.0%
- Trade between China and Brazil, China, South Africa rose by over 50.0%
From another article related to intra-emerging markets trade :
“The Geneva-based World Trade Organisation (WTO) estimates intra-emerging market trade rose on average by 18% a year from 2000 to 2008, faster than commerce between emerging and advanced nations. It totalled $2,8-trillion in 2008, about half of emerging-market trade with all nations.
That performance is especially welcome now given the sluggish recovery in the rich economies, said HSBC’s King, author of Losing Control: The Emerging Threats to Western Prosperity and a former UK Treasury official.
Chinese exports to the emerging world accounted for about 9.5% of gross domestic product in 2008, compared with 2% in 1985, he calculated. India’s jumped to 7.3% from 1,5% and Brazil’s almost doubled to 6.3%. Emerging-market economies will grow 6.9% this year and 6.2% in 2011, King said, outpacing the 2.4% and 1.9% projected expansions of developed economies.
“There are now massive trade connections within the emerging markets and they’re becoming increasingly important,” said King in a telephone interview. “It means in one sense the emerging world is protected from the worst ravages of the developed world.””
The Chinese are making all the right moves. As China’s trade relations with the fast growing emerging markets develops further, the export-oriented economy becomes more diversified and will perform better even when the economies of the developed world struggle to gain momentum. However it must be noted that the U.S. and Western Europe will continue to remain as the largest export destinations for some time. But overtime China will become less reliant on the wealthy countries for growth as rising income levels in emerging countries coupled with demand for cheap goods make Chinese products attractive.
Five Stocks To Invest In The Chinese Healthcare Market
One of the fast growing sectors in China that is often overlooked by investors is the healthcare market. One reason for this is that very little information is publicly available about the Chinese healthcare industry. CLSA Asia Pacific Markets undertook an unprecedented look into the healthcare market and has published a 300+ page comprehensive report titled “China pharma almanac”. The research report was based on interviews with over 500 middle class consumers, hospital drug purchasers, pharmacies, physicians and cosmetic surgery centers.
Some of the key takeaways from the report are:
- China’s healthcare expenditure is projected to grow 20% annually and by 2014 it could reach $304.0 B providing universal healthcare to its entire population of 1.3 billion
- Hospitals derive 40-50% of total income from medicine sales
- 43% of China’s population live in urban areas which allow for greater access to healthcare services and technologies
- Cardiovascular disease, obesity and other diseases is projected to increase with growing affluence and lifestyle changes
- The prevalence of tuberculosis (TB) and other infectious diseases in China offers potential for vaccine makers to prosper
- Double-digit rise in patient traffic is boosting drug purchases especially for the treatment of chronic diseases including heart disease, cerebrovascular disease (or stroke), diabetes and hypertension
- Healthcare consumers ranked the U.S. as the top country for producing the highest-quality products while Japan was ranked at No.4
- Demand for cosmetic surgeries and procedures such as liposuction, wrinkle removal and blepharoplasty (eyelid surgery) is growing
- Patients still revere traditional Chinese medicines as they believe that these medicines addresses the root cause of a disease whereas western medicines just suppress the symptoms. However doctors and hospital drug purchases prefer western drugs
- There are 55 companies Chinese healthcare companies with market caps over US$1.0B and more than 20 companies have market caps in excess of US$2.0B
The opportunity for healthcare in China is significant and investors can take advantage of it. One way to invest in Chinese healthcare is to go with western drug companies that have strong presence in the Chinese market. In a survey conducted as part of this study, Beijing Tongrentang, Pfizer(PFE) and Yunnan Baiyao were ranked as the top three pharmaceutical brands. Local drug firm Beijing Tongrengtang is a maker of traditional Chinese medicines.
The top five foreign brands by quality are Pfizer(PFE), Glaxo - owned by Glaxo SmithKline(GSK), Novartis (NVS), Astra-Zeneca (AZN) and Johnson & Johnson(JNJ). UK-based GlaxoSmithKline(GSK) has a 5.07% dividend yield. Johnson & Johnson(JNJ) is a consistent long-term performer.
China’s Infrastructure and Real Estate Spending Continues to Remain High
The World Bank released its latest China Quarterly Update last month. The following are some of the key takeaways from this report:
1. In the first quarter of this year, a large portion of lending still went to local government investment platforms (LGIPs) as the chart below shows.
After infrastructure, local governments invest heavily in real estate. At the end of 2009, the total local government debt stood at RMB 8 trillion. This type of liberal lending by local governments may cause some of the loans turn into non-performing loans. Heavy government involvement in the real estate sector helps to maintain the current bubble. Hence when the inevitable crash occurs it will be severe. Despite being called the workshop of the world, lending to the manufacturing sector is the lowest.
2. The GDP is projected to grow 9.5% this year and 8.5% in 2011.
3. State-owned enterprises (SOEs) increased their role in the economy during the massive government last year. However in the long term, the weight of SOEs has declined both in terms of assets and production.
4. Consumption is likely to remain strong due to the vibrant and growing labor market.
5. Rising property prices have forced the government to implement new measures to cool down the market. Some of these measures include raising the minimum required and mortgage interest rates.
6. Stock prices have declined sharply on worries about policy tightening. The Shanghai Composite index is one of the worst performers in the world this year YTD and the index is well inside the bear market territory.
7. Despite the expansionary monetary policies undertaken since the end of 2008, inflation is likely to remain contained this year.
The 10 Largest and Most Liquid Chinese Companies
In order to identify the largest publicly-listed Chinese companies I used the S&P/CITIC China 30 index.
This index “covers the largest, most liquid Mainland Chinese companies with listings outside of Mainland China, providing foreign investors exposure to China’s growing economy. The index is representative of listed blue chip Chinese enterprises, and is drawn from the entire universe listed H Shares, Red Chips, P Chips, N Shares and ADRs listed on the Hong Kong, Singapore, New York and NASDAQ stock exchanges, and can be traded without restrictions by all investors.”
The components of S&P/CITIC China 30 index have an avergage market cap of about $11.5B. The top 10 stocks account for about 75% of the market cap share.
The Top 10 components of the S&P/CITIC China 30 index based on market cap are:
1. China Mobile (CHL)
Current Dividend Yield: 3.97%
2. Industrial & Commercial Bank of China (OTC: IDCBY)
Current Dividend Yield: 3.34%
3. China Life Insurance (LFC)
Current Dividend Yield: 0.80%
4. Bank of China (OTC: BACHY)
Current Dividend Yield: 4.19%
5. China Construction Bank (OTC: CICHY)
Current Dividend Yield: 1.55%
6. CNOOC Ltd (CEO)
Current Dividend Yield: 3.26%
7. Petrochina Co (PTR)
Current Dividend Yield: N/A
8. Tencent Holdings (OTC: TCEHY)
Current Dividend Yield: 0.28%
9. China Petroleum & Chemical (SNP)
Current Dividend Yield: N/A
10. China Shenhua Energy (OTC: CSUAY)
Current Dividend Yield: 1.78%
Will Chinese Savers Stampede Into Stocks Now?
The Shanghai Composite index is down over 21% as of last Friday and continues to fall further. An article titled “Chinese Savers Turn to Their Stockbrokers” in the latest edition of Bloomberg BusinessWeek suggests that equities are now preferred over savings and real estate.
From the article:
“Ordinary Chinese investors are looking to stocks for a lift. If they’re not careful, they may get the opposite.
Although the Shanghai Stock Exchange Composite Index is down more than 21 percent this year, Pan Weiting sees no better place to put her money. The 27-year-old Shanghai accountant recently shelved plans to buy an apartment after real estate prices reached record highs. The 2.25 percent interest she earns on the 400,000 yuan ($59,000) she has in her bank account is being nibbled away by rising inflation, which hit 2.8 percent in April.
If Pan were an American, she might switch to international stocks, gold, or municipal bonds. China’s financial regulations, however, limit her investment choices to property or domestic equities. It’s no contest. “The stock market is the best choice for the moment,” says Pan. “Even the bank staff advised me against depositing more money.”
Millions of other Chinese, who on average save half their income, share Pan’s dilemma. Property prices are often out of their reach. If they do buy real estate, they risk seeing their investment wiped out should the government’s recent curbs on mortgage loans finally chill the market. Inflation is forecast to climb 3.4 percent this year, according to the median estimate of 18 economists surveyed by Bloomberg on May 11. That will put more pressure on low-yielding savings accounts. “It becomes a question of who’s the least ugly girl at the fair,” says Victoria Mio, a Hong Kong-based senior fund manager at Robeco, whose firm manages $194 billion worldwide. “There is migration [to stocks] occurring, and the shift will accelerate with a few months of negative interest rates.”" (emphasis added)
Chinese households have very low debt levels.The household debt as a percentage of GDP is about 10% .In general, Chinese households save over 25% of their disposable income.Savings by businesses and households push the gross domestic savings as a percentage of GDP to exceed 50%.The combined personal and corporate savings in China equals $7.2 Trillion.
Some of the reasons mentioned in the article for anticipated the flow of funds into equities include:
- Low to negative interest rates on bank savings accounts
- Rising inflation rate. Inflation is projected to climb 3.4% this year
- Falling real estate prices as authorities have increased bank reserve requirements to slow lending
Despite all the reasons mentioned above, I believe Chinese savers are not going to rush into equities. Many global issues such as the European debt crisis, the chances of the global economy going into a double-dip recession, the Korean issue, etc. may affect the Chinese economy leading to accelerated decline in share prices. In addition, culturally the majority of the Chinese are very conservative and prefer property investments and savings to stocks.
Beijing Resident Throws Shoe at Property Developer
Chinese real estate prices continue to rise defying gravity. Prices in big cities such as Beijing, Shanghai, etc. are beyond the reach of the middle-class. I came across this video of a frustrated Beijing resident throwing shoe at a property developer.
Related articles:1) China property prices continue rise in April “SHANGHAI — Property prices in China posted the biggest year-on-year jump in nearly five years in April, official data showed Tuesday, amid persistent fears about a growing bubble in the real estate sector.
Prices in major cities rose 12.8 percent on year in April, the National Bureau of Statistics said on its website, marking the biggest year-on-year rise for a single month since the survey was widened to 70 cities in July 2005.”
2) Beijing Home Prices Plunge 31.4%
“May 11 — The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.
Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square mete”
