China’s “Common prosperity” plan is wide-ranging and ambitious. The intent behind it is to narrow the gap between the rich and poor in the world’s second largest economy. But first policy moves such as heavy regulations on technology companies and the private tuition sector rattled the markets. Should investors shun China for the time being? We spoke to Norman Villamin, CIO Wealth Management at Union Bancaire Privée (UBP).
AsiaFundManagers.com: How has the latest shift from ‘To get rich is glorious’ to ‘Common Prosperity’ impacted the investment landscape?
Norman Villamin: The landscape is changing. Political interventions have not been rare in China going back to its re-opening in the 1980s. However, current interventions have been different in nature and do suggest a different approach to Chinese equities is required.
China’s President Xi Jinping has outlined a ‘Common Prosperity’ objective which seeks to counteract some of the excesses that have emerged during China’s rapid growth phase over past decades with an underlying objective to narrow the wealth gap that has emerged in the country in recent years.
While socially admirable, the moves suggest a growing burden on corporate profits in the future. Undoubtedly, the Chinese economy will still grow. However, for investors, the share of that growth looking ahead will likely more evenly split between households/workers and companies/shareholders.
AsiaFundManagers.com: Which industries are most affected by the new era of “Common Prosperity”?
Norman Villamin: It appears that a recognition has emerged that the developmental benefits of the rapid growth of platform companies within China have now crossed a threshold in terms of social and potentially long-term economic cost that requires more active intervention in the near term and a different regulatory foundation in the medium term.
While anti-monopoly efforts have been an accelerating tool of enforcement, more recently, data security restrictions are coming into focus. Just as anti-monopoly efforts began gradually before ‘suddenly’ accelerating, similar moves on the data security front should no longer be a surprise moving forward. Indeed, tighter data security measures may not only serve as consumer protection as well as having national security purposes. They may also serve to limit foreign players by constraining their ability to leverage offshore economies of scale in the domestic Chinese market and allow emerging domestic players to continue to develop and thrive.
Beyond this, it is also apparent that the measures taken to date are increasingly being pursued not only with the consumer in mind, as seen in the online education sector. More recently, moves to ensure minimum wage compliance in the delivery platform realm speak to the wider social costs that burgeoning platforms are imposing on the overall economy and the new regulatory backdrop to distribute these costs more equitably.
AsiaFundManagers.com: What are the prospects for Chinese investments in the current situation and where do you see opportunities?
Norman Villamin: In the ‘Common Prosperity’ era, we suspect development goals will likely not be sacrificed. Instead, unofficial costs of ‘winning’ the race to lead key growth segments now come with the prospect of a redistribution of a portion of rents as the industry matures or a sharing of unexpected social costs as they emerge.
Moreover, a focus on companies and sectors at an earlier stage of the growth cycle may make domestically-listed A-share opportunities a more fertile hunting ground for investors looking ahead. So, to exploit these earlier stage opportunities fully, investors in the China space will likely need to incorporate a greater blend of both domestically-listed A-share as well as more accessible, HK or globally listed opportunities within their China allocations.
Looking at sectors, seven strategic technological areas identified in China’s 14th Five-Year plan may provide such early-stage opportunities for investors including artificial intelligence, quantum computing, integrated circuits/semiconductors, neuroscience, genomics/biotechnology, clinical medicine/health as well as deep space, earth, sea and polar exploration.
The early stage of development in these technologies and the likelihood of state participation reinforce our view that stock selection will become increasingly important. For investors seeking a shorter investment horizon, the focus on restricting monopolies and promoting social fairness could benefit second-tier players in still-fast growing sectors like e-commerce and streaming entertainment.
Opportunities may continue to exist in earlier stage internet companies that have long growth runways, such as those targeting younger generation users or latched on to structural trends like video-based consumption. While regulations will likely result in slower growth and lower margins for market leaders, positive demographic tailwinds may continue to drive those with strong barriers to entry.
AsiaFundManagers.com: What is your outlook for China investments for 2022?
Norman Villamin: In light of the developments since July, we believe the foundation for this ‘Common Prosperity’ agenda in China is still being laid. Indeed, we expect additional measures to be rolled out through March, 2022 when the National People’s Congress will meet and potentially outline the next phase of the ‘Common Prosperity’ era. We expect the run-up to the NPC should provide an opportunity to more clearly identify medium-term opportunities for investors ahead.
In the interim, passive investors in China should begin their pivot to a more active approach focused away from large-cap industry leaders who might be susceptible to new regulations as seen recently. Instead, a stock-selection focus on earlier stage growth opportunities in niche sectors may offer shelter during this on-going transition phase in the months ahead.
AsiaFundManagers.com: Thank you very much for the interview.
CIO Wealth Management
Union Bancaire Privée (UBP)
Norman Villamin joined UBP in November 2015 as Head of Investment Services and Treasury & Trading of UBP Zurich. He was appointed Chief Investment Officer Wealth Management in 2016. He has over twenty years of investment experience.