Video Link: https://youtu.be/9hSNXIHSwCs
In this episode, Li Lu was asked what are the unique challenges and opportunities in finding value investment opportunities in China?
In this episode, you’ll learn:
Investing in China; challenges and opportunities.
China's evolving financial market system.
China's stock market vs. U.S. stock market.
To check out all Collection: Li Lu <click here>
BRUCE GREENWALD 00:00
So where do you see the unique challenges and opportunities in sort of finding value investment opportunities in China?
LI LU 00:09
Well, China remains, I think, one of the best market, if you were a value investor. In many sense – in a sense, the market is still somewhat underdeveloped. The market today is not as representative as the real economy the way, for example, the United States is. And so there’s a lot of the development in that regard.
And the trading and the investors are still not as mature. And there’s still a mentality of fast trading, high turnovers, which actually render some of the companies, again, go through a faster pace of this boom and bust. Again, that usually provides opportunities for those mature patient investors who truly know what they’re doing.
And also, as you said, the service sector of the economy when it comes to financial services, is still yet to be developed. And China was really right at this stage in the financial services industry, actually is about to take off in a big way for many reasons.
And it's just so happens – Also, the Chinese government is quite keen in making macroeconomic policies quite conducive for the development of the financial services industry. And they’ve begun to open up to the global firms as well in a way that they’ve never done that before. So all those confluence of factors really make the market that much more attractive today than it was before.
BRUCE GREENWALD 01:52
Yeah, can I say something about that?
Financial services is probably the fifth and sixth largest service sector. The biggest is housing by far. The second biggest is medical care. The third biggest is education. And the fourth and fifth biggest are like wholesale and retail distribution and personal services, and then financial services, although in the US it’s a little higher than that. What about those sectors in China?
LI LU 02:18
That sector is also growing –
BRUCE GREENWALD 02:21
Right, but do you see opportunities in –
LI LU 02:24
Absolutely, we do.
BRUCE GREENWALD 02:25
LI LU 02:26
We see opportunity (Inaudible) basically.
Virtually every industry are going through robust growing stage, some more than the others. And even if the industry they’re not growing as fast, you can still find interesting companies, values. And I don’t have to – (Laughter) – you’re the guru for this field.
So different people tend to focus on different aspects of the industries and different aspects of the growth profile, some looking at value and high growth companies, some looking for values at moderate growth companies. Some look for value in places that don’t grow at all. (Laughter)
In fact, they’re probably declining and therefore they find even bigger markets. So if you are a true good investor in that sense, you can find value everywhere. But you will probably be more capable of finding values in a dynamically growing economies such as China. We are still growing at multiple times of the matured economy in the West, and there’s still enormous amount of inefficiency in this securities market. So that combination of those two really make it enticing.
On top of that one, a whole series of government reform will make those inefficiencies gradually be more efficient. And so that transition offers even more interesting opportunities. So this is a good time for global investors and certainly for U.S. investors as well.
BRUCE GREENWALD 04:11
Okay, in those terms that as Chinese financial markets are developing. Do you have certain reforms or other things you’d be interested in seeing implemented? Do you sort of have a top development that you like to see happen in the China financial markets or even in the China economy?
LI LU 04:32
Well in a sense, it’s already happening. That’s what I mean by the Chinese government and regulator has been very keen to develop the security market.
For years and years the Chinese security market is not very representative of China’s economy, partially because – it really the – of the IPO rules are based on what they call approval model. You have to go through layers of approval process in order to be listed.
And so the ones who are listed are the ones who really approved by government for whatever reason, sometimes often not really market driven. Compare with other markets such as the United States that it is based on registration based. And so it is market driven.
As a result of the financial market – the security market – here are quite representative of the true economy. And as the Chinese economy moving from an export import driven economy into more of consumer demand economy, the entrepreneurial companies with market driven dynamics are increasingly playing a larger role.
And therefore, this financial market have to reflect the changing dynamics and the Chinese government is determined to reform this IPO process from one of approval process model into one that is much like the United States of registration-based model. And so we are probably still early in that process. But as that process began to play out, we’ll see the financial market become more reflective of the real economy.
And the other big changes that is happening is that most of the financing are done through the banking sectors up to the point, you know, 80 plus percent. And over time, the financing is best to really do through what they call ‘direct financing’, mostly through market driven dynamics of fixed income, equity, etc. And so we see the overall financing model, the Chinese economy, from one that is more indirect, into more direct.
And so thus is the reason for opening up this financial service company – financial service industry – both for domestic players and global players. As we’re seeing that dynamic plays out over the next decade or so, there will be a lot more opportunities and the financial market will become more mature and there will be more institutional players coming into it. And the financial market size will become much, much bigger than what it is today.
So those are really all bode well for investors who truly understand what they’re doing basically in China.