This article was originally published on ETFTrends.com.
Special events are a benefit to membership in the ETF Think Tank, and last week, KraneShares hosted a special dinner for key investors to meet with Dr. Hong Liang, the Chief Economist and Head of Research from China International Capital Corp (CICC).
Her perspective about the trade negotiations with China was constructive and timely given her background and mainland view. She joined CICC in 2008, but previously was the Managing Director, Chief China Economist, and Co-head of Asian Pacific Economic Research over 2003-08.
Prior, she worked at the IMF as an economist from 1998-2003. Dr. Liang obtained her Ph.D. in Economics from Georgetown University in 1998, and her B.A. in International Relations from Peking University in 1991.
Her insights included:
• On the economy, she believes that Chinese Policy has pivoted from a deleveraging campaign to monetary and fiscal stimulus driven by the trade war. While monetary easing has potentially slowed beginning in April, she believes that tax cuts will have a positive effect in the second half of 2019. Her base case is for China’s GDP is for growth to be 6.4% in 2019 and accelerate through several catalysts. (urbanization, SOE reform, pension contribution reform). Pension reform, tied to SOE reform, could unleash significant consumer buying.
• Optimism about the flexibility that the Chinese government has with managing through the Trade Wars provided insights about the timeliness of an agreement. In her view, the trade war will accelerate China’s economy, opening up opportunities in agriculture, financial services, and leveling the playing field for private companies relative to SOEs. China has plenty of dry powder if a trade war drags on via monetary and fiscal stimulus. As the second largest economy in the world, a trade war that hurts China hurts the global economy, global multi-nationals, and has a myriad of unintended consequences. Disruption of global supply chains especially in auto manufacturing could have significant repercussions. Ultimately no one likes to be told what to do. Multi-nationals doing business in China could suffer from hard line trade tactics.
• A base case for confidence in the Chinese Stock Market involved: (1) The rise of domestic consumption coming through the rise of pension reform. China’s high savings rate is driven by mandatory pension contributions. There are a multitude of beneficiaries including internet and e-commerce companies. (2) Within the A Shares market, industry leaders are poised to benefit from consumer upgrades which would benefit luxury goods, higher value food companies, and industrials. Pharma and high-end manufacturing were favored sectors as well. (3) Pension reforms which will include raising the equity ownership levels. For instance, China’s social security fund is virtually 100% invested in Chinese Treasuries though this will change.