Value Parters (VP) is a Hong Kong-based fund manager that we have known very well for many years. We have visited them personally on several occasions and have been investing in some of their funds for years. VP is the only Chinese fund manager listed on the Board of the Hong Kong Stock Exchange. We will now translate and comment on the reflections of its Co-Chairman, Louis So, The report on the economic effects of the pandemic in China a few months ago.
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It would not be an exaggeration to say that the onset of the COVID-19 pandemic has led to the worst global economic crisis since the Great Depression of the 1930s. The combination of a demand shock, a supply-side shock, a financial shock and political upheaval has sent markets around the world reeling.
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While no one can predict how the world's economies will emerge from the crisis, some experts are making educated guesses based on current economic data. Whatever happens, a post-COVID-19 environment is going to be very different from anything in the past. China will certainly outperform other markets, although it may not sufficiently boost the growth of the global economy.
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At some point, this system will collapse. In the future, politically speaking, left-wing politicians will gain popularity and gain support. Then we think that some redistribution of wealth will occur.
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While the last 50-70 years have seen a period of global wealth accumulation, there were also periods when wealth was distributed. Such events occurred because of wars, or because governments allocated resources differently. That is something we can expect to happen in the world over the next five to ten years.
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On the consumer side, there will be a contactless economy, consisting of a boom in e-commerce and online entertainment. VP has positioned its portfolios to benefit from this trend.
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Companies will have to rethink their business models. In the past, just-in-time inventory management was the norm. But now companies will have to think about whether they need to build up cash reserves for inventory and supply chain management. That will also change the mindset of business leaders.
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COVID-19 could escalate a potential crisis of capitalism and the free market. The challenges may cause capitalism to falter. Providing a much better social welfare system could be a potential solution. Although it may affect the economic growth of countries, it will create a much happier environment for society.
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The relationship between China and the US will get worse before it gets better. China is not dependent on exports and does not rely on other countries to grow its economy as it used to. This will drive China into isolation for a while. But China and the United States will have no choice but to become friends, partners and allies again. Perhaps the Trump-Biden swap will bring this about.
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China will come out ahead. And it will emerge from the pandemic ahead of other markets.. The predictions are based on recent economic data from China showing a V-shaped recovery trend at both the macro and consumer levels. It is highly likely that China will take advantage of the pandemic to accelerate its growth spurt and economic leadership of the world.
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With data available just after the March crash, year-on-year figures showed that fixed asset investment fell 9.4 per cent in March, but increased to a 3.9 per cent positive gain in May. Retail sales were down 15.8 per cent in March, but only down 2.8 per cent in May.
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Even a business like electricity production showed a year-on-year decline of 4.6 per cent for the month of March, but returned to 4.3 per cent growth in May. The same pattern can be seen on the consumer side. Products such as cosmetics, furniture, automobiles, tobacco and alcohol experienced a similar V-shaped recovery.
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So China is now a fairly self-sufficient economy, and this has helped it to cope with the pandemic. China has innovation, production, distribution and also the end consumer within its borders. Therefore, the country is experiencing less supply-side trauma than other countries.
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China also has a much more modest stimulus programme than other countries. While the US is pumping out a huge stimulus programme consisting of about 18 per cent of its GDP and rising, China's stimulus package is less than 5 per cent of its GDP.
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We are quite optimistic about China. It is still on track to become the world's largest economy by 2030 or sooner. Therefore, several investment themes will be the main drivers of growth, including consumer upgrades, a growing number of high-net-worth individuals, technology and the explosion of 5G. There will also be more individuals seeking higher education, along with the development of online service platforms and a growing healthcare sector.
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China is too big to ignore at the moment. It accounts for 16 per cent of global GDP, which means we can look at it as an asset class in its own right.
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So do not expect China to slow down any time soon.. There are many factors to consider, such as the relationship between China and the US, and a possible resurgence of the virus. Only time will tell. But things looked much better in the second half of 2020 and so far also look much better for 2021 than in the other economic powers.