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THE NEW CHINA: The Endgame to Investing in the Middle Kingdom

THE NEW CHINA: The Endgame to Investing in the Middle Kingdom. Introduction. Agenda Where China was Where China is Where China is headed China’s obsession China the problem China the opportunity So, what do you do?. Section I: The Time Stone takes us back.

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THE NEW CHINA: The Endgame to Investing in the Middle Kingdom

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  1. THE NEW CHINA: The Endgame to Investing in the Middle Kingdom

  2. Introduction Agenda Where China was Where China is Where China is headed China’s obsession China the problem China the opportunity So, what do you do?

  3. Section I: The Time Stone takes us back

  4. Timeline of Historical Events

  5. GDP and GDP Per Capita History

  6. # of Companies Market Capitalization and Comparison to U.S. Source: Various

  7. Government Structure / Leadership Source: U.S.-China Business Council

  8. Export / Import

  9. Source: World Bank Database

  10. Source: World Bank Database

  11. Section II: Snap (Where China sits today)

  12. Demographics Source: Index Mundi

  13. Trading Partners + Positive Balance - Negative Balance Source: World Bank Database

  14. GDP per Capita 2018 GDP Per Capita Selected Countries / Regions (000’s) * USD Constant prices, 2010 PPP Source: OECD.Stat

  15. Foreign Investment Investing in China Largest Foreign Direct Investment Recipients* #1 United States ($275B) #2 China ($136B) #3 Hong Kong ($104B) Largest FDI Outflows* #1 United States ($342B) #2 Japan ($160B) #3 China ($125B) #5 Hong Kong ($83B) World Banks’ 2019 Doing Business Report #4 Hong Kong #8 United States #46 China *2018 UNCTAD World Investment Report

  16. Market Cap and Number of traded Companies Source: World Bank Database

  17. Market Opportunity Set China weight in MSCIACWI and MSCI EM The view from MSCI EM Index Data as of July 31, 2019, sourced from MSCI. The “Economic Exposure” bar represents the economic exposure of MSCIACWI Index/MSCI EM Index, calculated based on MSCI Economic Exposure Data Module

  18. Military Spending Source: World Bank Database

  19. Debt

  20. Foreign Assets / Liabilities Source: IMF Balance of Payments; McKinsey Global Institute analysis

  21. U.S. T Holdings Source: U.S. Treasury

  22. Section III: Guardians of the Galaxy Vol. 3 (China projections)

  23. Projected GDP per Capita Real GDP (PPP 2010) Source: OECD

  24. Projected Military Spending Global Order Disturbed- Military Spending

  25. Export / Import Future China • Belt Road Initiative (New Silk Road) • More than 60 countries signed on or planning to (2/3’s of the world population) • $68 B China-Pakistan Economic Corridor (connects to Chia to Gwadar Port) • $200 B spent so far • Estimates of $1.2 Trillion over next 8 years • Expand use of renminbi in trade • “Break the bottleneck in Asian Connectivity” President Xi • Creating 50 special economic zones • The other side • Projects use low interest loans creating debt burdens from emerging economies • Direct funds to corrupt government officials • Required use of Chinese contractors with inflated costs • Made in China • 10 year plan to update manufacturing base • Focus on high tech (electric cars, next gen IT, telecomm, Robotics, and AI) • By 2025: 70% self-sufficiency in high tech industries • By 2049: A dominant position in high tech global markets • The other side • Chinese government subsidies • Acquire foreign companies to gain tech access • Investment from State Owned Enterprises • Forced transfer agreements

  26. Export / Import Source: Mapping Chin’s Middle Class: McKinsey and Company

  27. Export / Import Top 10 investor economies into Africa by FDI Stock (Billions of dollars) Source: UNCTAD

  28. A Shares Listing and Capital Markets Source: MSCI

  29. Projected Debt Source: Bank for International Settlements

  30. Growth of the Middle Class Source: William Blair

  31. Projected Debt – Level of Reserves

  32. Engineers, Patents, Technology and Innovation Intellectual Property and the Future * World Intellectual Property Organization ** World Economic Forum

  33. Section IV: “I Can Do This All Day” (China’s goals and objectives)

  34. Content Population (excerpts from Xi speech) • China’s goals and objectives (from President Xi’s speech at the 19th National Congress) 10/18/17 • Long term stability of leadership (No successor named and changes to the constitution) • Achieve a thriving middle class by 2020 • A Global Power with a first-class military by 2050 • Improve average citizen’s quality of life and promote a cleaner environment • The harmonious coexistence of man and nature • Gradual shift from growth at any cost to more balanced growth • Party must unite and lead the people of, all ethnic groups, to build a well-off society in an all-round way

  35. Content Population (excerpts from Xi speech) • Expand trade routes through BRI • Wipe out poverty by 2021 • Be a “fully developed nation” by 2049 • Narrow the wealth gap • “Socialism with Chinese characteristics” is “a new choice” for other developing nations • “Taking a driving seat” in fighting climate change • “the party leads everything, everywhere”. • “to get rid of all outdated thinking and ideas and all institutional ailments”.

  36. Section V: No amount of money ever bought a second of time (Say no to China)

  37. Concerns re: China U.S. (?) Yes Yes Yes Yes Yes No Yes Yes Yes Yes

  38. More Concerns U.S. (?) Yes Yes Yes Yes Yes Yes

  39. Section VI: I Love You 3000 (Go long for long)

  40. Positives

  41. Section VII: Part of the Journey is the End (Investment options)

  42. Options • Let the Benchmark drive the allocation – As MSCI, et al, increase A shares so will typical portfolio • Pros • No real action required • Don’t have a mismatch to the benchmark • Cons • Means that an index provider drives typical allocation • At some point will have 41+ percent of EM in a single country (which happens to be China) • Active asset managers may not be ready to assess A shares and available companies • Can create substantial sector weight issues due to SOE’s (financials and industrials) • Manager availability a problem

  43. Options Work to a higher weight to China now Pros Takes advantage of future increase in typical allocations Takes advantage of growth opportunity More aligned with China’s global contribution Cons Increases benchmark mismatch Usurps asset managers typical role May need to carve out China to do so Manager availability a problem

  44. Options • Work to a lower than index weight to China now • Pros • Maintains diversified exposure to EM’s • Protects in the face of possible escalation of difficulties • Account for high correlation with certain consumer discretionary stocks (luxury brands) • Cons • Usurps asset managers typical role • May need to carve out China to do so • Increases benchmark mismatch

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