Emma Wall: Hello and welcome to the Morningstar series 'Market Reaction'. I'm Emma Wall and here with me today is William Fong, Director of Asian Equities for Baring. Hello William.
William Fong: Hello.
Wall: Good to have you here with us today.
Fong: Thank you.
Wall: So we've had some news that the government in China is admitting now lot of downward pressures on the economy. What do you think these are and how can they get through them in order to have positive growth both in the economy and the stock market?
Fong: To me it is actually not a new news, because we all know that Chinese economy has been growing very fast in the last decade. GDP we are talking about 10%, 11%, but given the size of Chinese economy, it has become so big it is unlikely that they can maintain such high growth rate. So as a result we are seeing the GDP growth to lower from 10% to 6% or 7% in the few years going forward.
But there are some misunderstandings that it is hard lending. In our view is not hard lending, it is a managed kind of slow down and at the same time Chinese Government would like the economy to be more driven by consumption, rather than like in the past is was mainly about infrastructure. Because there is a lot of excess capacity in China. And in my view Chinese government has a lot of ways to stimulate the economy. Just last month we saw the Chinese government start to cut the interest rates. So it is one of the two which is monetary easing which can help them to manage this gradual slowdown.
Wall: I mean 6% or 7% to people in the West sounds like fantastic GDP growth at a rate we can only dream of. But so much of the region is driven by sentiment. And I think investors hear that slowdown, that three percentage point cut in growth, and they get scared and that’s affected the stock market.
Fong: Exactly you are very right. Because if you look at China stock market performance in the last few years, basically the market has been moving side way that means at the same time, we underperform, we perform less good as a lot of market in the world. I think most of the reason is because people are very concerned about the slowdown. On one hand we saw the GDP from 10% cut to 7% is a lot. So there are lot of concerns and some misunderstanding as well. But looking ahead because this year GDP we are talking about 7.5% and going forward the slowdown kind of magnitude will largely narrow. So therefore I think it is time for us to look at China market again. Because for us it probably has been underperforming and there also risk of slowdown is already discounted. So it may be a good time to look at the market again.
Wall: How can we guarantee that it's not just going to continue to move sideways as you quite rightly pointed it has been doing?
Fong: If you have a look at the Shanghai Asia market this year and year-to-date the Shanghai market actually performed much better than other developed markets. We have been arguing that Chinese market is a bit undervalued, that’s because there are some concern about a slowdown. At the same time the retail sentiment in China is also very poor. And on one hand they are concerned about slowdown as well and on the other hand a lot of their money is already invested in the properties market and other high yielding assets, for example like some of the trust products.
And actually in the month of November and December we have the interest rate cut and at the same time we also have the scheme about the Stock Connect between Shanghai and Hong Kong. I think those become a very strong catalyst to drive the retail investor back to the stock market. So as a result in 2014 we finally, we saw the Shanghai market outperform the rest of the world.
Wall: So those two things; the opening up of the Chinese stock market to both foreign investors and local investors getting behind the stock market as well. What does that mean for 2015, you expect that the market will take-off again?
Fong: I think the rationale of this Stock Connect is very simple. In the past Shanghai's Asia market is more like a closed market it is very difficult for foreign investor to buy an Asia company, it is a very slow and time consuming process.
But now with the Stock Connect basically it allow the overseas liquidity to go into Shanghai and at the same time the Shanghai domestic investor can also invest in Hong Kong companies. So it is two ways mutual benefit to the two sides. And if you look further ahead it is actually one of the very important steps in Chinese opening up of financial market.
I am sure that if the Stock Connect is successful we may see other connects going forward. For example like bond connect commodity and even other currency kind of connection. So that means China will be more and more open and at the same time a lot of investors if in the past they cannot buy Asia. Now there is a way for them to do that. So in the long run I'm actually very positive on this scheme.
Wall: William, thank you very much.
Fong: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
