The world is reordering: the “Golden Age” of the West is coming to an end and US dominance is dwindling. Asia continues to advance, and China in particular will be one of the big winners. The opening of the Chinese capital market offers attractive opportunities for investors. A guest article by Andreas Grünewald, founder and CEO of Munich-based asset management company FIVV AG.
China implements visionary plans – West largely without plans
Although it went unnoticed by most people in this country, China started its massive and impressive race to catch up almost 40 years ago. Over the past three decades, the Middle Kingdom has developed into the fastest growing economy in the world. The most powerful man in the country is Xi Jinping, general secretary of the Communist Party and President of China. He is committed to a policy of reform and openness.
China presents not only its five-year plan at party conferences, but also a visionary plan for the next 30 years. Xi wants to turn the country into a prosperous, eco-friendly, high-tech nation. In doing so, he relies on a mix of state control and deregulation, as well as an increasingly open economy. The goal is to become an innovation leader in all key technologies by 2025. These include power generation, e-mobility, aircraft, railway and ship construction, as well as robotics, mobile communications technology and medical technology. R&D spending is already higher than in the EU as a whole, and is growing faster than in the US.
The number of international patent applications is now higher than in Europe, the USA and Japan combined. At the international level, the new Silk Road will be an opportunity to develop an intercontinental infrastructure network between Asia, Europe and Africa. By 2049, the 100th anniversary of the founding of the People’s Republic of China, the country should be modern, strong and prosperous.
How, on the other hand, do our Western plans for the future look? Our visions for Germany, Europe or the USA? Instead of focusing on the future, topics such as over-indebtedness, Brexit, refugees, real estate, banking and financial crisis are on the agenda. We are failing to make urgently needed investments in our infrastructure, children and education. We are neglecting to promote the few industries and technologies in which we are still world market leaders.
At the same time, hundreds of millions of young and well-educated Chinese adults are becoming consumers for the first time and are fuelling the economy. Today’s business leaders, who did not receive adequate training between 1966 and the late 1970s due to the Chinese Cultural Revolution, are being replaced by academics with impeccable qualifications. Parallel to this is the strong political will to assume more and more responsibility and leadership internationally. While US President Donald Trump takes numerous protectionist measures and feels he is dealing with half the world, Xi Jinping is committed to world trade. At the recent People’s Congress it was stated that the Chinese market should be completely opened for the manufacturing industry and that barriers to market entry for numerous sectors such as finance, medicine and telecommunications should be further dismantled.
Twenty-five years ago, the German economy was about four times the size of the Chinese economy on a US dollar basis. Today, China’s gross domestic product (GDP) is about four times larger than the German economy. With a GDP of almost $13,000bn in 2018, China is now the second largest economy in the world after the USA. It is set to swiftly close the gap, before overtaking the USA in the coming years.
China’s contribution to global economic growth in recent years has been around one third. With exports worth $2,300bn, China is the world’s largest exporter. The Middle Kingdom accounts for around 25 percent of global automobile sales. Almost a quarter of the world’s 500 largest companies already come from China, according to the business magazine Fortune.
The current trade dispute between the USA and China will not change this significantly. China’s total exports to the USA amount to just $500bn or four percent of the Chinese economy – less than China’s GDP will grow this year alone. In addition, a penalty duty does not mean that these sales will be completely lost. On the one hand, some consumers will want to continue purchasing these goods despite price increases. On the other hand, China can act as a counter-reaction by devaluing its currency and promoting affected companies, thereby mitigating a price increase. Last but not least, China is increasingly seeking to build bridges within Asia, to Europe and – especially – to Africa in order to become even more independent of the USA in the future.
China capital market: opening offers opportunities for investors
Shanghai is on its way to becoming a global financial centre. The Chinese equity and bond markets are opening up step by step. They enable investors to expand their product range and achieve better risk diversification. Chinese blue chips are currently valued comparatively favourably at an index level of, for example, the CSI 300 of a good 3,000 points with an average price-earnings ratio (P/E ratio) of about 10. The overall environment described above should boost Chinese corporate earnings and thus also the associated stock markets. From the investor’s perspective, however, a broad diversification of stocks and sectors as well as a long-term investment horizon are very important for risk reduction.
Companies from the segments infrastructure, (higher-value) consumer goods, health, Internet service providers, environment, education and leisure are favoured. For most investors, a broad-based Chinese fund that fits the desired industry focus and the risk/reward profile of the investor is likely to be the optimal solution. In addition, globally positioned corporations that have focused on China at an early stage or whose products are sought-after by Chinese buyers as status symbols benefit.
About the author
Andreas Grünewald, born in 1968, is the founder and CEO of Munich-based asset management company FIVV AG. His focus is on capital market research and financing. In the course of his 15 trips to China, he visited almost 40 Chinese cities with over a million inhabitants across the country and dealt primarily with Chinese and international companies, industrial parks, training facilities and infrastructure projects. Grünewald is a specialist author, speaker and guest lecturer at schools and universities. He manages the China fund FIVV-MIC-Mandat-China (ISIN: DE000A0JELL5).
FIVV AG serves private and corporate clients, institutional investors and foundations throughout Germany. As the first independent German asset manager, FIVV AG has had a representative office in Beijing since 2005 in addition to its headquarters in Munich.