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Beijing's Easing Of Covid Controls Points To Brighter Market, Business Outlook

Editorial Staff

9 December 2022

As reported earlier this week, China is loosening its zero-Covid regime in a bid to remove shackles from its economy. The controls had sparked widespread protests – challenging the very legitimacy of the Beijing regime only a few weeks after President Xi was re-installed as leader of the Communist Party-run nation.

The changes will allow infected people with mild or no symptoms to quarantine at home; there will no longer be tests for people travelling within the country.

Dato' Seri Cheah Cheng Hye, co-chairman and co-chief investment officer at how it looks for the global investor. The world that my generation of investors knows has changed a lot because we're used to a world where the US-dominated and provided an umbrella for a sense of security and safety. We investors only needed to focus on investing in business and commerce. And we could let political leaders and military generals take care of the geopolitics, but that's not true any more.

Global order has broken down; we have been swept by social unrest, financialisation, inflation, war, etc. Even climate change. We're seeing the weaponisation of trade, money, food supplies, and even human talent. So I think the prevailing investment approach of the last, maybe 25 years, with Fear Of Missing Out, doesn't really work anymore.

The FOMO approach almost guarantees that investors will be “whipsawed,” because markets have become so volatile and so unpredictable, and the central bank “put” – meaning the expectation of central banks coming to the rescue of markets at each and every crisis. Frankly, central banks have run out of room to implement such rescue packages, with the exception of a few countries such as China. We have enjoyed too long a period of easy money, almost free money, negative interest rates. The amount of money printed since 1996 has increased several times the size of the real economy. There's very little room there, and it has become a very fragile situation of over-financialization and rising inflation.

How do you survive the challenging environment for global investors? I will argue that you survive by identifying long-term durable themes for investing; themes that allow you to ride out the roller-coaster swings to the market, where almost every prediction can be proven right or wrong. What you want is a solid, durable investment theme that allows you to hold on to the conviction and eventually allows you to preserve your wealth and pass it from one generation to another. I believe it's up to each investor to figure out what their preferred long-term theme is. But the key is that you must be in a situation where you can avoid the risks of buying high and selling low.

For me, examples of long-term themes will include energy assets, food assets, and key commodities, including copper and lithium, defence stocks because the world is getting increasingly uncertain. And one of my favourite themes is Chinese stocks and bonds. China has simply become too big to ignore, and the key to sustainable investing, in my view, is to find a sustainable society that can withstand this era of huge social, global, monetary and financial disorder throughout our planet.

In China, there is a foundation of sustainability and a large and growing middle class. China’s middle class today of 400 million people is larger than the population of the US, and it is growing very fast. Chinese middle-class people are likely to number 800 million or so by the end of the decade. This is a very solid foundation of an inclusive society that people buy into. And that allows the country to provide its own huge domestic market for innovation, manufacturing, and distribution. It is a self-contained continental economy that I think provides a high chance of sustainability which I believe is key to wealth preservation.

There are very significant changes going on in China in terms of how people save and invest their savings, and this is really the world's largest pool of savings. The 25-year addiction of the Chinese public to buying property is beginning to fade away. This is something that's happened only since Covid started so many people don't realise this, but Chinese household wealth used to be more than 50 per cent represented by just one asset class. Real estate today is more like 37 per cent.

Meanwhile, the percentage of household assets allocated to capital market products, to professionally managed funds has risen to 13 per cent from just above zero a generation ago.

Chinese people have discovered the value of investing in the capital market. And this is something that the Chinese government is nurturing, this relocation of savings and wealth because the property market is over-invested, and it was actually a bubble, and it was no longer very productive. Eighty per cent of Chinese households in the cities already own one or more properties. So, China wants to redirect savings to productive investments, especially innovation, green energy, and manufacturing. And it is happening.

Why we are excited, of course, is that it means there is a lot of new money waiting to enter the stock market and support share prices and valuations, all from the Chinese mainland. At the same time, there's a supply of new ideas and new initiatives.

A lot of Chinese companies are choosing to IPO in Shanghai, Shenzhen, and Beijing – the mainland domestic markets. This assures a lot of new opportunities for the public to enjoy investing their savings, again moving away from the property market. So, overall, we are quite confident to say that a new economic cycle has started in terms of structural changes, valuations, sentiment, and the overall global economy. I think China is entering a new era. It is the turn of Chinese stocks to shine.

About the author

Dato’ Seri Cheah has been in charge of Value Partners since he co-founded the firm in February 1993 with his partner, V-Nee Yeh. Throughout the 1990s, he held the position of chief investment officer and MD of Value Partners, responsible for managing both the firm’s funds and business operation. He led Value Partners to a listing on the Main Board of the Hong Kong Stock Exchange in 2007.