You're listening to Strictly Business Podcast with Lindsay Williams.
According to Chinese astrology, horse is confident, agreeable and responsible,
although they also tend to dislike being reined in by others.
They're fit and intelligent, adoring physical and mental exertion.
They're decisive, but also easily swayed and impatient.
The Chinese year of the horse starts on February the 17th. This year ends February
the 5th, 2027.
But we're not here to talk about astrology.
We're here to talk about the Chinese economy in the year of the horse.
With me is Wen Chang Ma, portfolio manager, China Equity at 91 in Hong Kong.
The last year of the horse, I think 2014, Wen Chang, things have changed for the
China economy since then.
Quite a lot, I think.
Yes, absolutely.
I think since 12 years ago, the China market has become more mature.
The growth drivers in the Chinese economy have become...
certainly more diversified.
And I think the overall policy framework has become more clearly oriented towards
stability,
quality and the long-term competitiveness in the overall economy as well.
Was that a result of the property situation, which was so well publicised
and is still unwinding?
I think the property situation is part of the transformation for China to move away
from the very heavy CapEx driven.
type of business model towards a more sustainable,
diversified growth drivers business model.
So I think it is part of it, but it's not the entirety of the story.
If we look at today's China in terms of the growth drivers, we see that
China continues to open up and the export continues to remain very strong.
And the Chinese companies are also investing
more and more overseas in terms of their capacity to be able to help them to
continue to gain market share
overseas, especially in the emerging markets categories.
And at the same time, you also have innovation becoming a very important
driver as well.
And we're seeing a diverse range of innovative fruits coming from the Chinese
economy, including the information technology space.
including AI, robotics, industrial automation, in healthcare,
and it continues to lead the renewable energy transition categories as well.
So we're basically seeing that the China economy is going through this big
transformation and becoming more resilient along the way, moving away from
properties.
The properties are used to...
contribute to almost 30% of the economy.
Now it has gone below 20% already, and it's replaced by these other drivers that
I have talked about.
Yes, the other drivers are very interesting.
Exports would always be an important part of the China economy, of course, but AI,
very important sector everywhere in the world.
And there seems to be a fight between prominence when it comes to United States
and China.
And China is so far ahead when it comes to energy.
And that seems to be giving them the edge, or rather, that's the sort of media
rhetoric that I hear.
Yeah, I think this is definitely a very fluid and very interesting dynamic that
has been
developing in the AI related industry in China.
So this is, you know, one of the
most consequential themes shaping the outlook for this year in the Chinese
economy and the Chinese equity
market as well.
And China has a quite comprehensive overall supply chain that can play into
that
AI-driven growth as well, all the way from the upstream, you know,
IC design, IC manufacturing, down to the
AI implementations by large internet companies.
And most importantly, I think since last year's deep-seek moment,
China has been demonstrating its capability of becoming a lower-cost AI
player
in the global competitive landscape.
So that is certainly quite interesting.
Chinese companies are still investing quite heavily into AI, but comparing to
the U.S.
hyperscalers, the level of investment by Chinese companies is still quite small.
So the key focus here is how to develop cost-efficient AI applications and
to be able to find the right monetization model as early as possible.
And at the same time,
we see that China's abundant electricity is a very strong competitive advantage for
China's
AI race.
And that is supported by years of advanced development in terms of renewable energy
and the
investment into the grid network as well.
So that is an advantage that I think is quite remarkable for China.
Yes.
And as you say, it's an evolving fluid situation.
I have to talk about energy and I don't want to politicize this chat.
But Mr. Trump, president of the United States, says that China just makes the
windmills and then exports them.
And China doesn't have any renewable energy or not renewable energy of any
consequence.
That is, of course, wrong, isn't it, Wen Chang?
I think it is clearly an area in terms of competition.
U.S.
leads the most advanced chip design manufacturing that is related to AI.
U.S.
hyperscalers still lead the CapEx spending globally in the development of AI
technology.
But China leads in terms of the advantages when it comes to energy.
And in fact, if we just look at some of the numbers,
the amount of solar installation in China last year was almost equivalent to...
all the solar energy installation that the US has ever done.
So that just basically speaks about the gap in terms of this energy
transition.
And for the development of AI, you do need quite strong computational power,
but you also need a strong energy supply to be able to support the
sustainable increase of your computational power and also on the inferencing side.
So that is something that I think both the US side and the China side is trying to
raise.
So US needs to catch up in terms of its energy supply.
And China needs to catch up in terms of its most advanced chip design and chip
manufacturing technologies.
I want to talk about asset classes now, which asset classes offer value for
investors.
and as your portfolio manager, China Equity.
I want to focus on equities.
And you say in a report that you kindly sent me,
you say equity valuations in several areas still reflect excessive pessimism.
So when there's excessive pessimism, Wenchang, there's obviously opportunity.
Yes, absolutely.
So if we look at the China economy as measured by earnings
revisions, so the China equity market has already gone through over.
four years of earnings downward revisions.
But if we take the outlook for 2026 and compare the China market to the rest of
the major
equity markets,
where consensus expects the most significant EPS growth is in the China
market.
So that speaks of an important recovery in terms of the profitability for Chinese
companies.
And that's expected to be fueled by the growth drivers coming from innovation,
coming from consistent strength in the export categories.
And it also speaks to less headwind from the areas that were previously more
nuanced,
such as the property-related industries,
as well as the consumer segment that previously had been quite weak.
So as those headwinds gradually dissipate,
you expect that the company's earnings overall should start to improve.
And over the past five years,
China has been over-investing into manufacturing capacity and at the same
time under-consuming.
The pricing environment in China's domestic industries has gone quite
badly.
So basically, the Chinese government has launched the anti-involution initiatives
since mid of
2024, and we have started to see some results in selective industries.
And that should also help the profitability in those industries that are
benefiting.
So overall, I think with earnings starts to stabilize and even improve in certain
industries,
that paves a way for a continued...
strong equity returns going forward.
And if we look at a certain industries where valuation has remained quite muted,
these are clearly areas that we can look for bottom-up opportunities from.
What about regulation?
You've talked about earnings and you've hinted at regulation, but regulation for
overseas investors,
is it becoming easier and will it become easier as we go into the year of the horse
and also get the results of the
upcoming 15th five-year plan, Wencheng?
I think for the 15th five-year plan,
the overall tone so far has been emphasising on stability and on the
quality of growth.
It seems that...
The government is focusing on the transformation in promoting a healthier
growth model in the next five years and also beyond.
And if we think about the overall policy environment,
it has remained roughly supportive in terms of growth since the past two years.
And that's likely going to be the case still for the year of the horse.
So we don't expect to see very significant stimulus coming from the government.
So their focus is likely going to remain on the reforms that are
more structural in the economy.
And at the same time, we think that overall regulation will be taken into
consideration of the potential
impact on entrepreneurship and on employment.
Looking forward to next week, you're going to be gratifyingly quiet, I would imagine,
after a busy time, Wen Chang.
But are you generally optimistic about the year of the horse?
I think we are quite constructive in terms of the equity market outlook.
Similarly, on the economy side,
I think we're seeing a lot of the headwinds that the economy has previously
been facing now gradually dissipating,
while the growth drivers become more visible and get to recognize by the equity
market,
which is helped by the earnings growths demonstrated by the listed companies.
Valuation is still not that expensive for China equity market,
especially considering the large discount comparing to the U.S.
market.
And also, I think our macro team, I think the outlook on the U.S.
dollar from our macro team is also supportive for emerging market asset class
in general.
And so that dollar cycle should be helpful for Chinese equities.
So all in all, we're quite constructive on the outlook for Chinese equities.
Very good, Wencheng.
Thanks so much for your analysis.
Wencheng Ma is a portfolio manager, China Equity at 91 in Hong Kong.
And Wencheng, Happy New Year.
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