IS CHINA WORTH THE INVESTMENT RISK? PROS & CONS WITH A SOVEREIGN RISK EXPERT AND CHINA FUND MANAGER

October 18, 2019

China’s middle class is growing and thriving with an estimated 400 million millennials alone, shopping and traveling. The Communist Party remains in control of the government and the legal system. The widespread western belief that democracy would develop as China’s economy and citizens flourished has not panned out.

Is China an unstoppable economic juggernaut with tremendous investment potential or a developing and thus risky economy?

With us this week to discuss the risks and opportunities are Idanna Appio, Senior Sovereign Analyst on the Global Value Team of First Eagle Investment Management.
Tiffany Hsiao is a Portfolio Manager at Matthews Asia, one of the first fund families to specialize in the region.

WEALTHTRACK Episode #1616; Originally Broadcast on October 18, 2019

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IDANNA APPIO

TIFFANY HSIAO

Consuelo Mack

Our focus this week is China. China matters because of the sheer size of its population, its economic clout and growing military power. China recently celebrated the 70th anniversary of the founding of the People’s Republic of China when Mao Zedong won a civil war, his opponents fled to Taiwan and he established a dictatorship ruled through a communist party he ultimately controlled.  

  

China is famous for taking the long view but context is important. It might represent an ancient culture but its current form of government is relatively new and evolving. It has been through several dramatic upheavals, some bloody and devastating, others astonishing in their scope and progress. 

 

During the Mao years from 1949 until his death in 1976, there were two major draconian attempts to change the economy and society. In 1958 there was the so-called “Great Leap Forward” to industrialize the economy.  The government forced farmers to collectivize leading to mass starvation of a recently expanded estimate of 45 million people.

 

From 1966 to1976 Mao carried out the “Cultural Revolution” where the people Mao labeled “bourgeois” elements, including educators, intellectuals, professionals and many Communist Party members were attacked by roaming gangs of Red Guard youth.  Millions of Chinese were displaced and sent to the country for re-education. Upwards of 2 million are estimated to have died in the process.

 

Mao’s death in 1976 was a huge turning point. 

 

President Deng Xiaoping, now considered to be the “Father of Modern China” took over the party’s leadership. He emphasized practicality over ideology and stressed economic reform and opening.  Farmers were allowed to cultivate their own plots. Food shortages disappeared. Deng encouraged private enterprise and entrepreneurship. It was under Deng and his successors that the economy took off and flourished. China modernized and began opening itself up to the west, diplomatically and economically. In 1979 diplomatic relations were re-established with the U.S. In 2001 China joined the World Trade Organization, marking its entry into the global trading order.  In 2010 China overtook Japan as the world’s second-largest economy. 

 

One force has not changed, however. The Communist Party remains in control of the government and the legal system. The widespread western belief that democracy would develop as China’s economy and citizens flourished has not panned out. Examples abound: the one-child policy enforced from 1980 to 2016; the crackdown on pro-democracy demonstrators in Tiananmen Square in 1989 and the recent detention and supposed “re-education” of millions of Muslim Uighurs. 

 

Party control is becoming more centralized under the current president. Elected Communist Party chief in 2012 and President in 2013, Xi Jinping is consolidating his power. He is being compared to Mao as presidential term limits were eliminated in 2018.  He has announced ambitious plans of historic proportions: the 2013 “Belt and Road Initiative” to build the infrastructure to recreate the old silk road connecting Asia with Europe and Africa and the 2015 “Made in China 2025” strategy, a state-financed plan to make China the global leader in 10 critical industries. Meanwhile, China’s middle class is growing and thriving with an estimated 400 million millennials alone, shopping and traveling. 

 

Is China an unstoppable economic juggernaut with tremendous investment potential or a developing and thus risky economy? 

 

With us this week to discuss the risks and opportunities are Idanna Appio, Senior Sovereign Analyst on the Global Value Team of First Eagle Investment Management which includes their $50 billion flagship First Eagle Global Fund, rated five-star Bronze by Morningstar. Appio spent over 15 years at the Federal Reserve Bank of New York, most recently as Deputy Head of the Global Economic Analysis Department. One of her specialties is analyzing financial crises.   

 

Tiffany Hsiao is Portfolio Manager at Matthews Asia, one of the first fund families to specialize in the region. Hsiao is Lead Portfolio Manager of the $74 million Matthews China Small Companies Fund, rated five-star Silver by Morningstar. She is a member of the Matthews China team that manages more than $1 billion in China focused funds. 

 

If you are unable to join us for the show on television, you can watch it on our website over the weekend.  If you would prefer to take WEALTHTRACK with you on your commute or travels, you can find the WEALTHTRACK podcast on TuneInStitcher and SoundCloud, as well as iTunes and SpotifyIn this week’s web EXTRA feature Appio describes how she acquired her expertise in financial crises and Tiffany Hsiao her personal experience with Chinese entrepreneurship.

 

Thank you for spending your precious time with us. Have a splendid weekend and make the week ahead a profitable and a productive one.

 

Best regards,

 

Consuelo

Mathews Asia

FIGURE OUT HOW YOU WANT TO BE INVESTED IN CHINA AND TO WHAT DEGREE CHINA INVESTMENT CHOICES:

  • INVEST INDIRECTLY THROUGH COMPANIES DOING BUSINESS THERE
  • INVEST IN GLOBAL INDEX FUND (MUTUAL FUND OR ETF) BASED ON AN INDEX THAT INCLUDES CHINA

EXAMPLES OF MAJOR INDICES THAT INCLUDE CHINA:

  • MSCI ALL COUNTRY WORLD INDEX = 3.6% CHINA
  • MSCI ALL COUNTRY WORLD INDEX EX U.S.= 8.3% CHINA (Chinese tech companies like Tencent & Alibaba among top 5 holdings)
  • MSCI EMERGING MARKETS INDEX = 33% CHINA

INVEST IN CHINA SPECIFIC INDEX OR ACTIVELY MANAGED CHINA FUND

    MORNINGSTAR TOP RATED ANALYST MEDALISTS:

  • * MATTHEWS CHINA FUNDS
  • * COLUMBIA GREATER CHINA FUND
  • * INVESCO GREATER CHINA FUND

No Bookshelf titles this week.

APPIO: HEDGE AGAINST RISK

  • Own gold bullion
  • Have a strategic allocation
  • Potential hedge against unforeseen risk

HSIAO: STOCK PICKER’S HEAVEN

  • Own China small-cap companies
  • Opportunity to invest in entrepreneurial, world-class companies
  • Currently depressed by worries about the trade war and macro risks
No stock mentions in this episode.
This transcript will be available soon. More information regarding WEALTHTRACK transcripts can be found here

Tiffany Hsiao from the WEALTHTRACK Archives:

UNLOCKING CHINA’S UNDISCOVERED TREASURES WITH MATTHEWS CHINA SMALL COMPANIES FUND’S LEAD PORTFOLIO MANAGER, TIFFANY HSIAO

Chinese small company stocks are an undiscovered asset with enormous potential. Tiffany Hsiao, the lead portfolio manager of the category and market-beating Matthews China Small Companies fund explains the attraction.

LISTEN NOW…

APPIO: CRISIS WARNINGS

How do you predict a financial crisis? Idanna Appio has been studying financial crises since her undergraduate days at Wharton, wrote her Ph.D. in economics on the topic and spent over 15 years at the Federal Reserve Bank of New York working on global economic analysis.

HSIAO: CHINESE INNOVATION CONNECTION

Where did Tiffany Hsiao find the inspiration to seek out entrepreneurial companies in China? It began early on with her dad.


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