New capital china equity fund value play sept 2013

New Capital

China Equity Fund

September 2013

Mansfield Mok

Portfolio Manager

New Capital China Equity Fund

For Qualified & Accredited Investors Only

China: The Ultimate Value Play

New Capital China Equity Fund: China --- The Ultimate Value Play

2

A Golden Decade for China Has Started

Rank Country – 2010 GDP*

(U$ Million)

Country – 2020 GDP*

(U$ Million)

1 USA 14,802,081 China 28,124,970

2 China 9,711,244 USA 22,644,910

3 Japan 4,267,492 India 10,225,943

4 India 3,912,911 Japan 6,196,979

5 Germany 2,861,117 Russia 4,326,987

6 Russia 2,221,755 Germany 3,981,033

7 United Kingdom 2,183,277 Brazil 3,868,813

8 France 2,154,399 United Kingdom 3,360,442

9 Brazil 2,138,888 France 3,214,921

10 Italy 1,767,120 Mexico 2,838,722

Source: Euromnitor International from IMF, International Financial Statistics and World Economic Outlook/UN/National Statistics

*The GDP numbers are in PPP terms

CHINA TO BECOME THE LARGEST ECONOMY


3

Unstoppable Global Trend….

FROM WEST TO EAST: THE RISE OF CHINESE MNCS

• Number of Chinese MNC in the Fortune Global 500

list has jumped sharply over the past eight years in

line with the fast economic growth in China.

• Chinese corporate has strong influence in the global

market as reflected by their involvement in global

M&As:

─ China Shuanghui to acquire US Smithfield Foods

for US$4.7 billion (May 2013)

─ CNOOC acquired Canada’s Nexen for US$15.1

billion (Feb 2013)

─ Bright Food Group acquired 60% stake of UK’s

Weetabix for GBP1.2 billion (Nov 2012)

Source: Fortune Global 500 List, 2005 and 2013

Number of MNCs in Fortune Global 500 List

Countries 2005 2013 Asia Pacific Japan 81 62 China 16 89 South Korea 11 14 Australia 9 8 India 5 8 Taiwan 2 6 Singapore 1 2 Malaysia 1 1 Thailand 1 1 G-7 Western Countries US 176 132 France 39 31 Germany 37 29 UK 37 26 Canada 13 9 Italy 8 8


4

China Is Less Affected By Fed Tapering

CHINESE ECONOMY IS LESS DEPENDENT ON CAPITAL INFLOW

• Slowing US Fed Purchases will have a bigger impact

on countries (highlighted in red) whose economies

are supported by capital inflows.

• China is running at current account surplus:

– Chinese economy has surplus domestic liquidity generated from its export of goods and services, compared to other countries.

• China has a low loan/deposit ratio:

– Chinese banking system is full of liquidity and does not rely on wholesale funding from foreign banks.

Source: * Loan-to-Deposit Ratio 2013, Deutsche Bank

** 2013 Current Account/GDP Ratio, Economist Intelligence Unit forecast

Country LDR (%)* CA/GDP (%)**

Australia 111 -3.6

South Korea 111 3.4

Taiwan 79 10.9

Hong Kong 69 1.2

China 67 1.7

Singapore 96 19.2

Malaysia 78 6.7

Thailand 113 1.0

Indonesia 88 -1.6

India 78 -4.1

Philippines 69 2.5

Euro Land 107 1.6

Japan 68 0.9

US 71 -2.8


5

Rerating Is Getting Close


6

Global Financial Crisis: An Opportunity For China

Source: Morgan Stanley

• The current financial crisis presents an opportunity for China

– Low interest rates will prevail and surplus liquidity will look for areas with strong growth potential

– Chinese central government has healthy balance sheet and stronger economic growth vs. G3

– Policy reforms taking place:

- Economic driver: domestic consumption will take the lead supported by the increase in minimum wage

- Pricing reform: facilitated by lower commodity prices and low inflation rate

- Financial System Reform Real GDP Growth Outlook

-2

-1

0

1

2

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6

7

8

9

China Japan US Euro World

2012 2013E 2014F

*Note: Index performance from 31 Dec 2010 to 30 Aug 2013

US( SPX Index); Japan (NKY Index); Euro (SX5E Index); China (MXCN Index)

Countrie

s

Current

Accoun

t

Fiscal

Deficits

Gross Public

Debt

Total

Return

(USD)*

US -2.9 5.3 76 37.6%

Japan 0.8 10.9 247 14.8%

Euro area 2.0 2.5 92 9.6%

China 2.9 2.0 52 -4.3%

All figures are CS estimates and represented as % of 2013 GDP


7

China Stock Market: Attractive Valuation

• Attractive valuation

– Valuations at historically low level in both P/B and P/E terms

• Under-owned asset class

– APAC hedge fund managers are still bearish on China as reported by CS Prime Services data.

Source: Credit Suisse Source: Nomura Securities, as at end August 2013

05

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3MS China - 12mth Fwd P/E(x)

Net exposure Change since Sept 2012 to 27 Aug 2013 ** (%pt)


8

What Will Trigger Rerating?

• Short-Term and Medium-Term Re-rating Catalysts:

– New QFII Monies Inflow:

− SAFE has granted some US$7billion+ QFII quota to foreign investors during the period from Dec 2012

to June 2013.

− These monies will need to invest into the Chinese A share and Bond market within the next six months

from the date of the grant.

– QDII2 (Qualified Domestic Individual Investor):

− This is a new program subject to approval, which allows Chinese investors to take positions in

overseas capital markets.

– Structural Reforms:

− The 3rd plenary session of 18th CPC Central Committee meeting will be held in November to discuss

deepening reform measures. Market friendly reforms are expected to be implemented in due course.

− These new reforms will unlock the growth potential of China, underwriting the start of a multi-year bull

market of Chinese equity.

THREE IMPORTANT CATALYSTS WILL SUPPORT THE MARKET IN THE NEXT FEW MONTHS


9

President Xi Has A Strong Desire For Reform

STARTED WITH ANTI CORRUPTION CAMPAIGN

• “The national anti-graft watchdog launched its official website, which allows citizens to send

information they have about corrupt officials either anonymously or by using their real names.” South

China Morning Post, 3rd September, 2013

• “Top Communist Party leaders have agreed to open a corruption investigation into former security

tsar Zhou Yong-kong, a retired member of the Politburo Standing Committee….” South China Morning

Post, 30th August, 2013

• “China's Ministry of Supervision said Monday it was investigating Wang Yong-chun, a vice president

at state-owned China National Petroleum Corp. for "severe disciplinary violations”….” Asian Wall

Street Journal, 26th August, 2013

• “The official Xinhua News Agency reported that the agency that supervises assets said an audit of

China Resources Group was under way and that any wrongdoing, if found, would be punished…”

South China Morning Post, 19th July, 2013


10

Reforms Create Opportunities

FOLLOWED BY MARKET FRIENDLY REFORMS TO UNLOCK GROWTH POTENTIAL

Most likely reforms Possible reforms Least likely reforms

Resource pricing reform Personal income tax reform SOE reform

Interest rate liberalisation Hukou reform Property tax

Capital account liberalisation Rural land reform Central-local relations

Greater exchange rate flexibility Budget transparency

VAT reform De-monopolisation

Resource/environmental tax reform Pension reform

Increase in social spending Relaxing one-child policy

Source: Deutsche Bank


11

Active Approach To Capture Economic Growth


12

Economic Growth vs Index Performance

INDEX PERFORMANCE FELL BEHIND GDP GROWTH DURING 2007-2012

Source: Bloomberg

China Nominal GDP

compound annual Growth p.a.

MSCI China Index Performance

compound annual return p.a.

3 Years to 6 Years to 3 Years to 6 Years to

2006 +16.8 +14.6 +27.5 +16.5

2007 +18.5 +15.9 +46.7 +31.3

2012 +15.0 +15.7 -1.3 +1.9

Note: * GDP growth and performance number are in CNY


13

What is “Re-Rating Potential”?

Zone A: Re-Rating (Accumulate)

• Company gradually increases its market share

and gains pricing power

• Investors are sceptical about the growth potential

of company and put in a low valuation.

− Insurance company at the current cycle are

trading at historic low New Business

Multiple despite the low penetration rate of

insurance product.

Zone B: De-Rating (Reduce)

• Company sees declining growth.

− Chinese Oil company saw sharp decline in

production growth over the years. They

became utilities and experienced P/E

contraction.


14

Top 10 MSCI China Index Components

WEIGHTING OF MATURE COMPANIES RISING

MSCI China Dec 2012 % Outlook and View

China Mobile 9.91 Mature; Zone B

CCB – H 8.17 De-rating due to interest rate deregulation

ICBC – H 6.52 De-rating due to interest rate deregulation

CNOOC 5.45 Mature; Zone B

BOC – H 4.74 De-rating due to interest rate deregulation

Tencent 4.60

Petrochina – H 4.22 Mature; Zone B

China Life Insurance 3.43

China Petroleum & Chemical 2.68 Mature; Zone B

Ping An Insurance 2.22

80% of top 10 Index component are mature companies and may not catch up with the economic growth of China

Source: Nomura


15

Outlook And Investment Theme


16

China’s Investment Outlook

• Sustainable, above-average economic growth

– Among the major economies, China offers attractive GDP growth of 7% pa backed by fiscal stimulus and

structural reforms.

– China is changing its economic model to one based on self-sustainable domestic consumption.

• Supported by healthy demographics and high saving rates.

• Global interest rate to stay low for a longer period of time

– Despite the concern of US Fed tapering, global economy remains lukewarm and there is no sign of inflation.

– PBoC will maintain its monetary easing policy in view of lacklustre global economy and low inflationary

pressure.

• Attractive valuation

– Market is trading at historical low levels in both P/B and P/E terms.

• Smooth leadership transition

– Implementation of structural reforms will unlock China’s growth potential.

• Risks

– Geo-political uncertainty.


17

Industry Trends

• SAP Second Quarter and First Half Results 2013:

“We’ve just started to see projects being released again. We’ll start to see some of that [State-owned enterprises]

spending happening in the third quarter, and we believe a lot more will happen in fourth quarter”. SAP Asia-Pacific and

Japan president Steve Watts, comments reported in SCMP, 20th July 2013.

• China Aviation Market :

“China is taking steps to deregulate its domestic and international aviation market, and may amend its closely watched

air transport treaty with the US.....”, reported in Asian Wall Street Journal, 5th September 2013.

• China Mobile:

“Citing industry sources, Reuters yesterday reported that China Mobile awarded supply contracts worth about Rmb

20bn in its recent 4G infrastructure tender, with Huawei and ZTE getting about 25% each of that total…..The tender was

for the build-out of about 207,000 TD-LTE base stations to cover the main districts of 100 major cities across the

mainland””, reported in South China Morning Post, 24th August 2013.

IMPORTANT QUOTES


18

Current Investment Themes …

• Internet Boom

− Growing importance of E-commerce and on-line shopping.

– Rising CAPEX for telecom operators

• Domestic Consumption

– Products with low penetration rates: e.g. autos, Smartphones, insurance products.

– Consumer companies with pricing power and good distribution networks.

– Consumer staples benefit from rising rural consumption.

• RMB Internationalisation

− Stronger pipeline for RMB offshore products.

– Banking reform.

• Deregulation of China’s interest rate policy.

• Gradual breakdown of old monopoly

– Structural de-rating of some State Owned Enterprises e.g. Big policy banks.


19

Another Major Trend In E-Commerce

CHINA WILL EMERGE AS THE LARGEST E-COMMERCE MARKET GLOBALLY IN 2013

• China has the largest population of Netizen,

with over 600m internet users and 286m of on-

line buyers.

• The e-commerce activities in China will pick-up

faster because of:

– Increase in broadband penetration – Rising smartphone penetration – Popularity of on-line payment systems – Increase in internet usage

Source: Credit Suisse

E-commerce penetration and sales


20

A Big Increase in Middle Income Group

Source: McKinsey Insights China

• China’s middle income

consumer will reach 166

million household by 2020,

double total of US, Japan and

Germany.

• The increase in middle income

consumer will support the

demand for discretionary

goods.

UNDERWRITING STRONG CHINA DEMAND FOR CONSUMER PRODUCTS


21

RMB Internationalisation: Banking Reform

CHINA BANKS ARE TO FOCUS ON THEIR MAIN BANKING BUSINESS

• Basel III: Banks are required to increase their Capital Adequacy Ratios and have no additional capital for

other businesses e.g. insurance

• Interest rate deregulation: This will break the oligopoly of the big five banks and provide a more

favourable operating environment for other specialty lenders

• Deepening/broadening corporate bond market: This will result in an additional funding source for new

players.

Emergence of the non-bank financial sector:

–Insurance and specialty lender


22

… and the Ones to Avoid

• Gaming:

– Lack of Earnings transparency – over 70% of profit are from VIP tables.

– Forecasting earnings growth is impossible as VIP revenue is not predictable.

• Alternative Energy:

− Solar Energy:

- Sub-standard business model which requires government subsidy.

– Shale Gas in China:

- Not feasible under the current environment as China has a water shortage issue.

NOT ALL INVESTMENT THEMES ARE INVESTABLE FROM A BOTTOM-UP PERSPECTIVE. EXAMPLES:


23

Positioning & Strategy

• Overweight

− Information technology

- Telecom equipment provider

- Internet Company

– Autos and consumer staples

• Underweight

− Chinese banks but overweight special lenders, insurance and HK financials

– Telecom operators because of rising expenses due to handset subsidy

– No exposure in Energy because it is a mature sector. Their flat production volume means that they cannot

capture Chinese underlying economic growth.

– Zero weighting in materials and capital goods.

• Strategy

– The implementation of the market friendly reform will kick-start a multi-year bull market for China Equity.

– The current correction will provide an excellent opportunities to accumulate selective names.


24

Sector Weighting

AS AT 30 AUGUST 2013


25

Top 10 Holdings

AS AT 30 AUG 2013

Holding % Nature of Business

Baidu Inc 5.70 The largest search engine in China

Shenzhen Int’l 4.62 An RMB Internationalization play

New China Life -– H Share 4.29 One of the largest life insurance companies in China

Tencent 4.11 The China internet company having a “Facebook” business model

China Everbright Ltd 4.08 A listed China Fund Manager

ZTE – H Share 4.03 One of the largest telecom equipment makers

China Life – H Share 4.01 The largest life insurance company in China

Far East Horizon 3.92 The largest leasing company in China

Wilmar International 3.86 A plantation conglomerate which will distribute corn flakes in China

Chongqing Rural Commercial Bank – H Share 3.58 A niche Chinese bank with strong deposit franchise


26

Year-to-Date Attribution vs MSCI China

Source: Bloomberg as at 30 August 2013


27

New Capital China Equity Fund

• The New Capital China Equity Fund invests in equities of

public companies with significant business activities in the

People’s Republic of China and Hong Kong. The equities

are quoted securities listed or traded on stock exchanges

worldwide

• The investment strategy adopts a fundamental stock-

picking approach by investing in small, medium and large

companies which have re-rating potential

• Stock selection is driven by bottom-up analysis of earnings

outlook, profitability trend, balance sheet strength and

management quality of a company

• The investment horizon of the strategy is between one to

three years, allowing the hidden potential of the companies

to be reflected in the share price over time to achieve

capital appreciation

INVESTMENT OBJECTIVE & STRATEGY.

Sub-Fund

Name New Capital China Equity Fund

Investment

Style

Equities Long Only, with options and

futures for protection

Markets China and Hong Kong primarily (all caps)

Benchmark MSCI China Index

Base Currency USD

Max Cash No cash limit and no leverage

Fund Entity UCITS IV – New Capital UCIT FUND PLC

Regulated by the Central Bank of Ireland

Base Fee 1.75% (Ordinary) 0.90% (Institutional)

Liquidity Daily dealing


Peer Group Performance Comparison

NEW CAPITAL CHINA EQUITY FUND OUTPERFORMED PEERS AND BENCHMARK SINCE INCEPTION (20/8/2012)

Source: Bloomberg as at 30 August 2013

28

-10

-5

0

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15

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25

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20

/08

/201

2

03

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/201

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17

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/201

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01

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/201

2

15

/10

/201

2

29

/10

/201

2

12

/11

/201

2

26

/11

/201

2

10

/12

/201

2

24

/12

/201

2

07

/01

/201

3

21

/01

/201

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04

/02

/201

3

18

/02

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/03

/201

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01

/04

/201

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15

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29

/04

/201

3

13

/05

/201

3

27

/05

/201

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10

/06

/201

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24

/06

/201

3

08

/07

/201

3

22

/07

/201

3

05

/08

/201

3

19

/08

/201

3

New Capital China Equity Fund MSCI China Index BB China Peers Index


29

Stock Example: Baidu (BIDU US Equity)

CHINESE GOOGLE GOES MOBILE

Source: Bloomberg from 31 Dec 2010 to 30 August 2013

• Baidu is a Chinese web services company with a

dominant position in Chinese language search

engine for websites, audio files and images.

• The company has been expanding its mobile

services to include on-line video and mobile app

store, capturing the fast growing ecommerce in

China.

• Baidu has strong balance sheet and cashflow

from advertising revenue. Its recent acquisitions

will bring the company to the next stage of fast

growing business opportunities in Chinese

ecommerce market.

Date

Pri

ce


30

An Experienced Investment Team

A DEDICATED, LOCALLY-BASED TEAM SUPPORTED GLOBALLY.

Years denote investment experience in industry.


31

Fund Manager

AN AWARD WINNING FUND MANAGER: THE SUCCESS OF A “BOTTOM-UP RE-RATING” STRATEGY

• Mansfield Mok has over 22 years of investment experience

• During his five year tenure at GAM, the $1.5 billion GAM Star China Equity Fund, co-managed by Mansfield, outperformed the MSCI China Index from August 2007 to April 2012 by 72.1%* net of fees

• Mansfield began his investment career in 1990 as an analyst with Hoare Govett, before moving on to ING Barings Securities HK Limited in 1992 and Munich Re Asia Capital Management in 2000

• Awards won:

– Taipei Foundation of Finance-Bloomberg Awards 2012 & 2011: GAM Star China Equity Fund – Best Foreign Fund (3 years)

– Professional Adviser Awards 2011: GAM Star China Equity Fund – Best Fund Manager Over 3 years

– Lipper Fund Awards 2011, Switzerland: GAM Star China Equity Fund – Best Equity China Fund Over 3 years

– Lipper Fund Awards 2011, Hong Kong: GAM Star China Equity Fund – Best Equity China Fund Over 3 years

*Source: Bloomberg (31 July 2007 – 30 April 2012). Past performance is not an indicator of future performance.


32

0

20

40

60

80

100

120

140

160

180

200

5432112111098765432112111098765432112111098765432112111098765432112111098

201220112010200920082007

Aberdeen Global Chinese Equity A2 Templeton China A Acc $ GAM Star China Equity USD Acc

Fidelity Greater China A-USD First State China Growth II Acc Schroder Greater China

Characteristics of a Concentrated Portfolio:

• Alpha is mainly generated in an up-market where the “Buy and Hold” re-rating strategy is most successful (early 2009 to mid 2010)

• Insurance protections including use of index put option and the increase in exposure of high dividend yield stock will enhance return in the down market (2008).

• Insurance protection policy will be less effective when the Fund’s AUM reaches USD500m (mid 2010).

• When the Fund’s AUM grows beyond US$500m:

- the investable universe will shrink

- more time to build/exit a position

During Mansfield Mok’s five year

tenure at GAM, the $1.5 billion GAM

Star China Equity Fund outperformed

the MSCI China Index by 71.1%

Past performance is not an indicator of future performance.

Source: Bloomberg

Competitive Landscape


33

UNDER MOK’S CO-MANAGEMENT, THE GAM STAR CHINA EQUITY FUND ACHIEVED SIGNIFICANT ABSOLUTE AND RISK-ADJUSTED OUTPERFORMANCE AGAINST BOTH THE BENCHMARK AND COMPETITORS.

GAM Star China

-20

-15

-10

-5

0

5

10

0 10 20 30 40 50 60

Std Dev

5-y

r re

turn

Return (Ann) vs. Std Dev

(Aug 2007 – July 2012)

Past performance is not an indicator of future performance. Benchmark MSCI China Index

Source: GAM, MSCI, Lipper

Source: Morningstar

Outperformance of the Index calculated net of

fees, in USD

Top 10 out of 122 Peer Group

Peer Group Analysis


34

Appendix


35

Definition Of Various China Shares

A-Share: RMB-denominated ordinary share. It is issued by domestic companies for trade with RMB by domestic

institutions, organizations and individuals (exclude Taiwan, HK and Macao investors).

B-Share: RMB-denominated special share. It is traded in foreign currency on the Shanghai and Shenzhen markets.

B-share transaction was only for natural persons, legal persons and other organizations overseas or in Taiwan, HK

and Macao, Chinese citizens settled in foreign countries, and other investors allowed by the CSRC. After February

19, 2001, the commission opened the B-share market to domestic investors with foreign currency.

H-Share: companies incorporated in Mainland China and whose listings in Hong Kong are approved by the China

Securities Regulatory Commission (CSRC). Shares in these companies are listed in Hong Kong, subscribed for and

traded in Hong Kong dollars or other currencies, and referred to as H shares.

Red Chip: enterprises that are incorporated outside of the Mainland and are controlled by Mainland Government

entities. The most important difference between a red chip company and an H-share company is that a red chip

company is not Mainland-incorporated

Source: China Securities Regulatory Commission website

HK Stock Exchange website


36

QFII (Qualified Foreign Institutional Investor) Scheme: This is a transitional arrangement introduced in 2002,

allowing foreign investor’s direct access to China's capital market. Institutional investors who meet certain

qualification are allowed to invest in a limited scope of cross-border securities products in Mainland. Under which, the

quota, products, accounts, and fund conversions are strictly monitored and regulated.

RQFII (RMB Qualified Foreign Institutional Investor) Scheme: a scheme which allows qualified holders of RQFII

quota to raise funds in Hong Kong and channel such funds to directly invest into Mainland securities available in the

Mainland securities market.

QDII (Qualified Domestic Institutional Investors) Scheme: Under this scheme, qualified domestic financial

institutions (such as banks, funds and investment companies) are entrusted by domestic investors to invest in

stipulated overseas financial products according to their agreed investment terms and methods. Investment gains

and risks will be borne by investors or shared between investors and QDII holders according to agreed terms.

QDII2 (Qualified Domestic Individual Investors 2) Scheme: This is a trial program which allow Chinese investors

to take positions in overseas capital markets. Currently, Chinese individual investors can only invest in foreign capital

markets via funds offered by authorized fund managers or securities companies under the QDII program.

Different Investment Schemes In China

Source: China Securities Regulatory Commission website; HK Stock Exchange website


37

China: Emphasis on Quality Not Quantity

• “To achieve this year’s development targets the room to rely on stimulatory policies

and direct government investment is not big and we will need to rely on market

mechanisms.” Li Keqiang, Chinese Premier, comments reported in FT article (by Jamil

Anderlini), 15th May, 2013

• “China’s undergoing economic restructuring, which sometimes is not in lockstep

with growth. We need to sacrifice short-term growth for the purposes of reforms and

structural adjustments.” Zhou Xiaochuan, PBOC Governor, comments reported in

Bloomberg article, 22nd April, 2013

• “China’s model of development is not sustainable so it is imperative for us to speed

up the transformation of the growth model.” Xi Jinping, Chinese President, comments

reported in FT article (by Jamil Anderlini), 8th April, 2013


38

Strong Demand for Discretionary

Source: McKinsey Insights China

RISING IMPORTANCE OF CONSUMER SPENDING


39

Insurance: An Underpenetrated Business

Source: IMF, Swiss Re, Manulife

GDP, Penetration and Life Market

(Life Insurance penetration vs. GDP per Capita

2011 P

rem

ium

as %

of

GD

P

2011 GDP per Capita (US$)

Emerging Markets

Mature

Markets

Future

Giants


40

Market Review: 1H 2013


41

Three Major Macro-Economic Events

• Aggressive Bank of Japan QE program

– Over the past year, Asia Pacific Equity portfolios have been underweight Japan.

– The aggressive BoJ QE program has triggered inflow back into Japan due to portfolio adjustment.

– The China equity market was one of the funding sources.

• Investors worry that US Fed may start tapering its QE program

– Bond yield edges higher.

– Higher bond yield triggered profit taking on EM Bonds, EM Equities and high dividend yielding stocks.

• Surge in SHIBOR

– SHIBOR went up in late June ahead of the half-year end. The market considered it as an early sign of a

credit crunch in China.

– The concern of a likely credit crunch in China led to selling pressure on Chinese banks.

PORTFOLIO ADJUSTMENT SAW WEAKER CHINA EQUITY PRICES


Portfolio Adjustment Is Almost Done

• Asia Pacific Equity Portfolios have been

underweight Japan for the past few years.

─ As reflected from the continual outflow

since late 2007.

• Portfolio adjustment started in late 2012

following an aggressive BOJ QE program:

– Portfolio managers put monies back to Japan by reducing exposure to other Asian countries, in particular China.

– Cumulative flow for Japan went back to mid 2007 level suggesting that the adjustment is almost done

Data as of 24 July 2013 42 Source: Morgan Stanley


43

Interbank Rate Has Less Influence on China

CHINESE CORPORATE FUNDING COST IS STILL LARGELY BASED ON PBOC OFFICIAL LENDING RATE

• Interbank lending in China only accounts for a

small portion of China’s real economy.

− China has a close capital market and its

interest rate is not fully liberalised. Most

corporate borrowing rates are still based on

the PBoC lending rate.

• Investors should view the proactive action of

CBRC positively.

− The surge in SHIBOR in June was due to the tightening measures implemented by CBRC on various financing channels.

• Risk of a credit crunch is low in China

− China has large FX reserves and should be

able to provide liquidity into the banking

system if needed.

Source: Morgan Stanley

Recent Regulatory Tightening on New Financing Channels


44

US Credit Crunch in 2008

2008 US CREDIT CRUNCH WAS TRIGGERED BY PROPERTY CRASH

• 2008 US credit crunch was triggered by a property

crisis where property prices dropped 20% from

their peak. This led to rising property foreclosure.

• US property/mortgage has unique features which

contributed to the collapse:

─ Very small (No need for) down payment

• Less cushion for the banking system

─ Mortgage loan is a non-recourse loan

• Bank will have big capital loss on default

─ High urbanisation rate in the US

• Less genuine end-user demand


45

Risk Of a China Credit Crunch is Low

RESIDENTIAL PROPERTY PRICES ARE STILL ON AN UP TREND

• Property market remains healthy and will not put banks at risk:

─ Property price is still on an up trend

─ Mortgage’s loan-to-value ratio of around 60-65%

─ China’s urbanisation rate is only 50 and rising

─ Highly leveraged property developers are the weakest link

• Risk of a credit crunch in China is low:

─ China is running a close capital account and can control the

inflow and outflow of capital

─ China has US$3.4 trillion foreign reserves and can be injected

into the banking system

─ State-owned banks still dominate in the banking system and

will become the lender of last resort if needed.


46

Chinese Households Are Less Indebted Than The US


47

Chinese Labour Market Trend

Slow down in growth of “working age” population

Source: IMF


Disclaimer

48

Issued by EFG Asset Management (UK) Limited which is authorised and regulated by

the Financial Conduct Authority. Registered No: 7389746. Registered address:

Leconfield House, Curzon Street, London W1J 5JB. Telephone: +44 (0)20 7491 9111.

This document does not constitute an offer to sell, solicit or buy any investment product

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Country of origin of the collective investment scheme: Ireland

New capital china equity fund value play sept 2013

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