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Inside Asia: The future of Asia

Fidelity

Fidelity - Research team

Fidelity China Special Situations PLC portfolio manager Dale Nicholls debates the role of China and the rest of Asia in the new global economic order. Dale is joined by Dr Keyu Jin from the LSE to shine a spotlight on US-China tensions, while Fan Bao, Chairman and CEO of investment bank China Renaissance Group, provides a unique insight into China’s new economy.
 

Key points

  • China has now reached a point in its development where it will be innovation that drives future growth. Government policy is supporting this.

  • Domestic Chinese firms have been focusing on their domestic market, but now a number of leading companies are looking to expand overseas.

  • China is making a huge effort to open up its capital markets and flows into China could be the biggest global asset allocation shift we see over the next decade.

Key takeaways

How do you see the future US-China relationship playing out?

KJ: China’s economic success is really at the root of the tensions that we’ve been seeing in recent times. The US ultimately wants China to change its state-driven economic model which, in reality, isn’t going to happen.

I think tensions are here to stay but the US election result has the potential to change the short-term dynamics. If the Democrats win, then we are likely to see a platform of more global co-operation and co-existence. This would be welcomed by China, as the top political leadership in the country does seem committed to preserving a harmonious relationship with the US.

Longer-term, China has now reached a point in its development where it will be innovation that drives future growth. So we’re seeing government policy that is really focused on creating the right conditions for innovation, with the aim of becoming self-sufficient from a tech perspective.

Given this innovation focus, what are the latest trends you’re seeing on-the-ground?

FB: Over the last couple of years we’ve seen a new generation of entrepreneurs in China that are more globally-minded and outward-looking. You can see evidence of this in a number of areas, whether it is idea exchange across the region or the level of investment we are seeing from China in markets like India and Indonesia.

DN: The pace of change in China is rapid and it’s a hyper-competitive market. China’s tech emergence is unique and very different to what we’ve seen previously in Korea and Japan, where businesses were built on exports. In China, companies have tended to focus on the huge domestic market, but we are now at a stage where companies with unique technologies are looking to expand in overseas markets. ByteDance and TikTok would be a good example in this regard.

Elsewhere, Alibaba’s financial arm, Ant Financial, now has a number of joint ventures across south east Asia facilitating digital payments and is really involved in helping to build out the tech infrastructure in these markets.

In China’s consumer space, another key theme we are seeing in the rise of local brands that are gaining market share from well-known international competitors. This is often due to having a deeper understanding of the local market and being able to cater to local taste. International brands continue to be popular in certain areas, but on the whole Chinese consumers have a growing appetite for local brands as they become increasingly affluent and proud of their own culture.

How have China’s domestic capital markets evolved over recent times?

FB: China is making a huge effort to develop its capital markets, whether that’s through launching new stock exchanges like the Star Board or through reforms which make it easier for foreign investors to access domestic markets. There’s clearly growing interest from overseas as investors want to capitalise on China’s growth drivers. Nonetheless, there are complications related to geopolitics which need to be factored into overall asset allocation and investment decisions.

DN: There’s no question that flows into China will grow and I think it will be the biggest global asset allocation shift we see over the next decade. China represents a high teens percentage of global GDP, yet it accounts for less than 5% of global markets. We’ve seen MSCI move to upweight China in its indices and this will continue over the coming years and drive flows.

What kind economic recovery are we seeing in China?

FB: As someone who lives and works in China, I feel that things are starting to get back to normal when you look at areas like domestic travel, shopping malls and cinemas. But there’s no doubt that Covid-19 has had a big impact on consumer habits and some of the changes we’ve seen will be long-lasting. There has been a sharp shift online in areas such as education and groceries that will likely stick.

KJ: It is important to not confuse a rebound with a recovery and if you look at all the major crises from the last 100 years, you will see that it has taken an average of seven years for activity to return to pre-crisis levels. In the UK, for example, the Bank of England is warning that the UK economy is facing its largest output fall since 1706. Other economies are facing a similar predicament and at the same time there has been a huge build-up of global debt. From a global perspective, China looks to be well-placed but the picture elsewhere looks a lot more challenging

DN: The pace of the recovery across the Chinese economy has been mixed. Service-related areas like restaurants are still struggling to get to back to pre-crisis levels but then on the other hand companies with an integrated online offering have done very well. From an investment perspective, I don’t take a huge macro view but I think it pays to be wary today - particularly when it comes to more cyclical stocks and sectors - and focus on companies that have their own individual drivers and aren’t too reliant on the macro environment.

To what extent are you seeing sustainability issues move up the corporate agenda?

DN: This is a major global trend and one that is also evident in China. For us, governance has always been key and there has been a greater focus on environmental and social issues over recent years. This is being driven not only by investors like us, but also the big companies, with Alibaba among the first to disclose an ESG report.  On the environmental side, the government is playing an important role in terms of setting stricter standards. There is now a high hurdle to meet these standards, which is actually driving consolidation in certain industries.

FB: We also see this in the private equity space, where limited partners are becoming more demanding in terms of understanding the ESG profile of investments. The last 30 years of development in China has been all about speed, but now sustainability is becoming a key issue.

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