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You're listening to Strictly Business
Podcast with Lindsay Williams.

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According to Chinese astrology, horse is
confident, agreeable and responsible,

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although they also tend to dislike being
reined in by others.

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They're fit and intelligent, adoring
physical and mental exertion.

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They're decisive, but also easily swayed
and impatient.

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The Chinese year of the horse starts on
February the 17th. This year ends February

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the 5th, 2027.

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But we're not here to talk about
astrology.

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We're here to talk about the Chinese
economy in the year of the horse.

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With me is Wen Chang Ma, portfolio
manager, China Equity at 91 in Hong Kong.

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The last year of the horse, I think 2014,
Wen Chang, things have changed for the

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China economy since then.

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Quite a lot, I think.

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Yes, absolutely.

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I think since 12 years ago, the China
market has become more mature.

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The growth drivers in the Chinese economy
have become...

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certainly more diversified.

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And I think the overall policy framework
has become more clearly oriented towards

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stability,

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quality and the long-term competitiveness
in the overall economy as well.

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Was that a result of the property
situation, which was so well publicised

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and is still unwinding?

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I think the property situation is part of
the transformation for China to move away

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from the very heavy CapEx driven.

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type of business model towards a more
sustainable,

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diversified growth drivers business model.

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So I think it is part of it, but it's not
the entirety of the story.

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If we look at today's China in terms of
the growth drivers, we see that

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China continues to open up and the export
continues to remain very strong.

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And the Chinese companies are also
investing

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more and more overseas in terms of their
capacity to be able to help them to

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continue to gain market share

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overseas, especially in the emerging
markets categories.

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And at the same time, you also have
innovation becoming a very important

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driver as well.

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And we're seeing a diverse range of
innovative fruits coming from the Chinese

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economy, including the information
technology space.

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including AI, robotics, industrial
automation, in healthcare,

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and it continues to lead the renewable
energy transition categories as well.

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So we're basically seeing that the China
economy is going through this big

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transformation and becoming more resilient
along the way, moving away from

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properties.

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The properties are used to...

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contribute to almost 30% of the economy.

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Now it has gone below 20% already, and
it's replaced by these other drivers that

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I have talked about.

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Yes, the other drivers are very
interesting.

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Exports would always be an important part
of the China economy, of course, but AI,

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very important sector everywhere in the
world.

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And there seems to be a fight between
prominence when it comes to United States

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and China.

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And China is so far ahead when it comes to
energy.

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And that seems to be giving them the edge,
or rather, that's the sort of media

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rhetoric that I hear.

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Yeah, I think this is definitely a very
fluid and very interesting dynamic that

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has been

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developing in the AI related industry in
China.

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So this is, you know, one of the

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most consequential themes shaping the
outlook for this year in the Chinese

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economy and the Chinese equity

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market as well.

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And China has a quite comprehensive
overall supply chain that can play into

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that

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AI-driven growth as well, all the way from
the upstream, you know,

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IC design, IC manufacturing, down to the

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AI implementations by large internet
companies.

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And most importantly, I think since last
year's deep-seek moment,

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China has been demonstrating its
capability of becoming a lower-cost AI

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player

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in the global competitive landscape.

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So that is certainly quite interesting.

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Chinese companies are still investing
quite heavily into AI, but comparing to

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the U.S.

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hyperscalers, the level of investment by
Chinese companies is still quite small.

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So the key focus here is how to develop
cost-efficient AI applications and

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to be able to find the right monetization
model as early as possible.

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And at the same time,

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we see that China's abundant electricity
is a very strong competitive advantage for

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China's

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AI race.

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And that is supported by years of advanced
development in terms of renewable energy

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and the

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investment into the grid network as well.

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So that is an advantage that I think is
quite remarkable for China.

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Yes.

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And as you say, it's an evolving fluid
situation.

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I have to talk about energy and I don't
want to politicize this chat.

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But Mr. Trump, president of the United
States, says that China just makes the

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windmills and then exports them.

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And China doesn't have any renewable
energy or not renewable energy of any

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consequence.

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That is, of course, wrong, isn't it, Wen
Chang?

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I think it is clearly an area in terms of
competition.

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U.S.

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leads the most advanced chip design
manufacturing that is related to AI.

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U.S.

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hyperscalers still lead the CapEx spending
globally in the development of AI

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technology.

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But China leads in terms of the advantages
when it comes to energy.

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And in fact, if we just look at some of
the numbers,

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the amount of solar installation in China
last year was almost equivalent to...

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all the solar energy installation that the
US has ever done.

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So that just basically speaks about the
gap in terms of this energy

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transition.

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And for the development of AI, you do need
quite strong computational power,

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but you also need a strong energy supply
to be able to support the

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sustainable increase of your computational
power and also on the inferencing side.

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So that is something that I think both the
US side and the China side is trying to

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raise.

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So US needs to catch up in terms of its
energy supply.

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And China needs to catch up in terms of
its most advanced chip design and chip

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manufacturing technologies.

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I want to talk about asset classes now,
which asset classes offer value for

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investors.

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and as your portfolio manager, China
Equity.

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I want to focus on equities.

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And you say in a report that you kindly
sent me,

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you say equity valuations in several areas
still reflect excessive pessimism.

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So when there's excessive pessimism,
Wenchang, there's obviously opportunity.

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Yes, absolutely.

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So if we look at the China economy as
measured by earnings

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revisions, so the China equity market has
already gone through over.

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four years of earnings downward revisions.

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But if we take the outlook for 2026 and
compare the China market to the rest of

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the major

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equity markets,

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where consensus expects the most
significant EPS growth is in the China

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market.

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So that speaks of an important recovery in
terms of the profitability for Chinese

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companies.

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And that's expected to be fueled by the
growth drivers coming from innovation,

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coming from consistent strength in the
export categories.

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And it also speaks to less headwind from
the areas that were previously more

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nuanced,

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such as the property-related industries,

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as well as the consumer segment that
previously had been quite weak.

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So as those headwinds gradually dissipate,

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you expect that the company's earnings
overall should start to improve.

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And over the past five years,

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China has been over-investing into
manufacturing capacity and at the same

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time under-consuming.

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The pricing environment in China's
domestic industries has gone quite

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badly.

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So basically, the Chinese government has
launched the anti-involution initiatives

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since mid of

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2024, and we have started to see some
results in selective industries.

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And that should also help the
profitability in those industries that are

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benefiting.

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So overall, I think with earnings starts
to stabilize and even improve in certain

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industries,

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that paves a way for a continued...

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strong equity returns going forward.

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And if we look at a certain industries
where valuation has remained quite muted,

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these are clearly areas that we can look
for bottom-up opportunities from.

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What about regulation?

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You've talked about earnings and you've
hinted at regulation, but regulation for

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overseas investors,

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is it becoming easier and will it become
easier as we go into the year of the horse

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and also get the results of the

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upcoming 15th five-year plan, Wencheng?

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I think for the 15th five-year plan,

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the overall tone so far has been
emphasising on stability and on the

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quality of growth.

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It seems that...

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The government is focusing on the
transformation in promoting a healthier

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growth model in the next five years and
also beyond.

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And if we think about the overall policy
environment,

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it has remained roughly supportive in
terms of growth since the past two years.

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And that's likely going to be the case
still for the year of the horse.

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So we don't expect to see very significant
stimulus coming from the government.

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So their focus is likely going to remain
on the reforms that are

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more structural in the economy.

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And at the same time, we think that
overall regulation will be taken into

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consideration of the potential

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impact on entrepreneurship and on
employment.

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Looking forward to next week, you're going
to be gratifyingly quiet, I would imagine,

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after a busy time, Wen Chang.

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But are you generally optimistic about the
year of the horse?

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I think we are quite constructive in terms
of the equity market outlook.

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Similarly, on the economy side,

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I think we're seeing a lot of the
headwinds that the economy has previously

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been facing now gradually dissipating,

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while the growth drivers become more
visible and get to recognize by the equity

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market,

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which is helped by the earnings growths
demonstrated by the listed companies.

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Valuation is still not that expensive for
China equity market,

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especially considering the large discount
comparing to the U.S.

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market.

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And also, I think our macro team, I think
the outlook on the U.S.

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dollar from our macro team is also
supportive for emerging market asset class

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in general.

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And so that dollar cycle should be helpful
for Chinese equities.

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So all in all, we're quite constructive on
the outlook for Chinese equities.

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Very good, Wencheng.

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Thanks so much for your analysis.

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Wencheng Ma is a portfolio manager, China
Equity at 91 in Hong Kong.

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And Wencheng, Happy New Year.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors.

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and do not reflect the policy, position,
or opinion of any other agency,

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organization, employer,

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or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision,

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and rethinking at any time.

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Please do not hold us to them in
perpetuity.
