Until just five quarters ago, China internet companies had been the place to crowd for phenomenal returns. However, the bull run came to an abrupt stop after the much-hyped IPO of Ant Group, the financial arm of Alibaba, was suddenly called off on the eve of its debut. Regulatory crackdowns alone cannot explain the sector’s whopping 73% crash from the peak. 

 

APS Senior Investment Director Wang Kangning takes us through the reasons that are more fundamental to the changing landscape of the sector: growth strategies that went awry, diminishing online traffic “dividend”, and increasing participation of short-term investors. 

 

While these headwinds are unlikely to turn around in the next few quarters, long-term minded investors should actively look out for the next wave of innovations at a time of pessimism. In the digitization of China’s transactions, numerous fronts are yet to be conquered.

Despite a slowing economy, the challenge of strict lockdowns to slow the Omicron variant, and the Ukraine crisis, President Xi Jinping is likely to emerge strong after the key October 2022 meeting of China’s top political leaders. 

 

In this month’s essay, APS China Deputy Chairman Professor Tan Kong Yam looks at how an extended tenure for Xi as the leader of China would influence government policy, US-China relations, and implications for global investors.

President Xi Jinping has called the upcoming 20th Party Congress later this year “a major event in the political life of the party and country”. This essay by Tan Kong Yam explores the inner workings leading up to this milestone occasion and implications for global investors.

We wish you happiness, good health, and prosperity in the New Year of the Tiger.

 

US President Biden held a virtual “Summit for Democracy” inviting such leading lights as Pakistan and the Philippines.

Our holiday read – “Captain Marvel and the Chinese Crusade” by Raymond Lim – is apposite here.

This is a beautifully written essay which looks into whether China is a monster to be slayed.

 

December 11 was the 20th anniversary of China’s ascension to the World Trade Organisation. 

Our “The Big Picture” looks into this.

Welcome to the inaugural issue of the APS China Monthly.

Our feature essay – “The Taiwan Question” by Raymond Lim – addresses an issue that are on many investors’ minds today.  

In our January Talk China webinar on “Hard Truths for 2021”, our investors asked me about the most important issue among the 10 hard truths for this year, the motivation behind China’s move against Alibaba, the relevance of growth versus value in China, and a number of other questions ranging from portfolio positioning to pandemic policy. In this edition, we share with you my answers to those questions that are germane to successfully investing in China for the long haul. 

 

Professor Tan Kong Yam, Kanishk Kakkar and Jason Yap show in their piece “Is China Winning the Trade War?” that the Sino-US trade war is not over, and China is still playing its long game of “Go”. The key battlegrounds have however shifted to the ASEAN (Association of Southeast Asian Nations) and European Union (EU) regions. They share why the manufacturing and trading of goods not considered to be of strategic importance will likely still be carried out in the ASEAN bloc, with China at the centre and effectively still the world’s factory, its workers forming a rich pool of consumers waiting to be tapped. 

 

Every day, millions of Chinese consumers enjoy a mindboggling variety of shopping choices, with rapid technological and logistical developments in China allowing them to now buy anything they want, anytime and anywhere they want. In “China Consumer: The Value Hunt”, Chris Xu and Cai Haoxiang draw our attention to fast-rising domestic Chinese brands, a segment that international investors tend to overlook when investing in China’s burgeoning consumerism. Offering quality goods at a reasonable price, domestic brands tap on innovative channels like livestreaming to win over younger, cash-rich consumers in lower-tier cities. Some of these brands can even go global. This is where the money is, rather than the usual e-commerce and logistics suspects.

Economies and healthcare systems across the globe start the new year battered and bruised by a wily virus that has defined 2020. As the United Kingdom took the lead in starting mass vaccinations in December amidst Covid-19 flare-ups, many investors are pricing in an imminent exit from pandemic conditions and a return to normal life. We think these hopes are premature.

In “Hard Truths For 2021”, I share with you my views for 2021: China’s probable 8%-10% economic rebound in 2021 and the fast forwarding of its anticipated return to the apex of the global economy around 2025, the resilience of Covid-19, rocky Sino-US relations, China regulating tech rather than punishing Jack, China e-commerce being more bubble than magic, the danger of Modern Monetary Theory and a plummeting USD, the revival of value investing, as well as the challengers to China’s crown as the world’s factory. 

 

In “Silver Bullets and Magic Wands – Can Covid-19 Vaccines Save 2021?”, Dr Sarah Li Yun examines topics such as the odds for vaccine “surgical strikes” eliminating the coronavirus with no collateral damage and no masks in sight, as well as the realities and myths of vaccines. 

 

In an extraordinary year like 2020 that saw all major economies contract painfully, China would not have posted 2%-3% growth without a strong domestic economy. Professor Tan Kong Yam and Cai Haoxiang show in their piece, “China’s Two-Horse Economy Will Canter On”, how Covid-19 and the trade war has given the country a powerful nudge towards a consumption-driven economy. Investors should continue to bet on the domestic demand horse, which can pull China ahead of other countries in the years to come. 

The United States’ presidential election in a month’s time is one of those defining moments in its history. Whether it will be more “American Carnage” or the return of the “Audacity of Hope”, it will also have an impact beyond its shores. In “Sino-US: Dominion”, Raymond Lim looks at this most important bilateral relationship in the world.

Jason Yap, Cai Haoxiang and Professor Tan Kong Yam discuss in their piece, “Breaking up with China is hard to do”, the impact of COVID-19 and rising Sino-US tensions on supply chain disruption across large and small companies globally, and explore the case for a global supply chain re-configuration, focussing on the US and China and the associated risks and opportunities.

 

In “Schrödinger Cat Walks Down Wall Street”, Wong Kok Hoi makes the case that one set of investment fundamentals can only lead to one outcome, no matter how many interpretations. The ultimate mathematics of investing is that the present value of the company must be about equal to the present value of all future cash flows most of the time, and there have been no exceptions in the history of investing. Any large deviation from this in the short term, such as the exuberant stock market rebound since March, will be brought back to reality by this investment axiom. 

Even in the midst of the coronavirus crisis, US-China tensions continue to ratchet up in the South China Sea. Raymond Lim’s piece on “What Xi’s China Wants” looks at why the South China Sea is the principal arena where the contest for strategic dominance by these two great powers is being played out. 

In this contest, China draws strength from a rising grassroots nationalism led by the post-1990, post-Deng generation. In “A Brief History of China’s Economic Transformation: A Personal Perspective”, Professor Tan Kong Yam examines the investment impact of this younger generation’s unfolding attitudinal transformation towards Chinese brands, at the expense of foreign ones.

Finally, in “Why China Now?”, Stella Zhang and Chris Xu take on the naysayers and make the case why it makes sense to invest in China.