View more on these topics

Hugh Young: China’s road to redemption

Hugh Young

We have always liked the China story: the rise of the middle class, urbanisation, high savings rates and pent-up demand. China’s President Xi Jinping, the nation’s most powerful leader since Deng Xiaoping, wants to be remembered as the statesman who turned the “Chinese Dream” into reality. At the heart of this aspiration is a blueprint for far-reaching reforms that promise a fresh start for the country.

But after decades of turbo-charged growth, China is now counting the cost: environmental degradation, social injustice and a broken economic model. China appreciates it needs to shift away from capital expenditure and an excessive reliance on exports towards a more balanced economy supported by domestic consumption. The authorities have the flexibility to manage this transition successfully.

From an investor perspective, reform cannot begin too soon. Despite decades of impressive headline growth, China’s stocks have languished for reasons that include poor governance, dominance of state-owned enterprises, low or minimal shareholder accountability and the lack of value creation. The lack of corporate governance has been the single most important obstacle for us. We still advise our clients, as a first step, to access China’s growth via companies that are listed offshore (usually in Hong Kong) where rules designed to protect investors are more rigorously enforced.

Since hitting a seven-year high in June, Chinese stocks have declined sharply, triggered by a clampdown on margin finance: the use of borrowed money to buy shares. While stock market performance has been below expectations, as bottom-up stock pickers, we remain cautiously optimistic because significant parts of China’s economy are not in state hands or subject to excessive control. These companies play an increasingly important role in job creation and need capital to grow. If the banks are constrained as sources of funding because of tighter liquidity, the stock markets can help.


The consumer story is attractive because boosting domestic spending forms a central component of China’s reform agenda. This translates into demand for property, travel, mobile phones, domestic appliances and supermarket groceries.

We are great believers in this story in part because we like businesses that are simple and easy to understand. We favour travel-related businesses that are set to benefit as more Chinese achieve aspirational lifestyles. Other areas to benefit from greater affluence include insurance and healthcare.

We are less enamoured of property because of the cyclical downturn and debt build-up. Despite the hype around e-commerce, the best opportunities are listed overseas and shareholders rights are opaque.

The authorities are committed to policies encouraging urbanisation. People in the countryside and migrant workers living in cities will be given legal rights that free up more disposable income, which will eventually swell the ranks of the middle class. With one of the highest savings rates in the world, spending should be underpinned for years to come.

Less ‘government’

The issue of state ownership is a complex one. For its admirers, China has perfected its own brand of state-run capitalism. The biggest firms are unimpeded by real competition. They have been able to undercut rivals abroad thanks to cheap funding.

The better-run firms are commercial and may be attractive to outside shareholders. The worst are value destroying: coal miners, steelmakers and industrial manufacturers. They benefited from policies that led to over-investment. The government recognises the need to slim down bloated state-controlled firms to achieve greater efficiency.

That discipline, however, has to come from the markets. The banking sector is arguably the most important test bed for liberalisation. Policymakers have proposed changes that include allowing market forces to determine bank deposit rates and to set the value of the yuan. The quality of companies raising money on the stock exchange should improve, as firms will need to compete more effectively for savings that could sit in bank accounts offering a competitive interest rate.

Hidden value

We have been investing in Asia long enough to realise that even a disappointing market can hide individual companies that excel at what they do and reward their shareholders appropriately.

There are companies that have successfully navigated repeated cycles of boom and bust, arbitrary access to credit and unpredictable officialdom. They are here for the long term and are well placed to benefit from comprehensive structural reforms that will lay the foundations for the next stage of China’s growth.

Hugh Young is managing director of Aberdeen Asset Management Asia



Mark Dampier: A special situation in China

There are times when I am reminded that time flies by faster the older you get. I recently had one such moment when I met Dale Nicholls, manager of the Fidelity China Special Situations plc. Unbelievably, the investment trust launched almost five years ago. Following a short spell of poor performance in the trust’s early […]


Jim Leaviss: The real story behind China’s growth

We have a global deflation scare. The new aim for central bankers is to get inflation up to 2 per cent, rather than driving it down as before. Recent Consumer Price Index levels in the US and UK give moderate cause for concern but it is the eurozone, with annual inflation of just 0.6 per […]


Long-term care cap pushed back to 2020

The Department of Health is delaying its plans to implement a £72,000 cap on the cost of long-term care. The cap was expected to come into force from next April, but has now been delayed until 2020. Care and support minister Alastair Burt says: “A time of consolidation is not the right moment to be […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm