Krane Funds Advisors is the advisor to the KraneShares CSI Five Year Plan ETF and the KraneShares CSI China Internet ETF. Enclosed is a weekly update of China’s economic and capital markets activity that was assembled by KraneShares and its Shanghai based partner, CapitalVue. Please contact us if you have any questions or comments.
Major News and Events
China Conference Shows Urbanization Remains A Key Economic Priority:
China conducted a major 2 day urbanization conference which included attendance by President Xi and Premier Li. The conference highlighted the importance of urban development as a crucial tool to boost China’s domestic consumption and drive industrial upgrading.
Key initiatives:
• Develop cities in China’s western and northeastern regions into engines for growth.
• Establish diverse and sustainable funding mechanisms to help finance policies.
• Priority will be given to investments in projects such as construction of affordable housing, railway infrastructure in central and western China and major projects to promote energy saving, emissions reduction and environmental improvement.
• Improve the taxation system for local authorities and establish categories of taxes that are “local-government oriented”.
• Encourage private investment to participate in building and running public facilities.
• Allow migrant workers to gain urban residency status in an “orderly manner”.
• Growth targets should be practical and realistic.
The conference reiterated the strategy outlined in the Third Plenum document that urbanization and the reform of the hukou system should first focus on small and medium-sized cities.
Financial Times Names Alibaba’s Jack Ma 2013 Person of the Year:
The FT announced that Jack Ma, godfather of China’s entrepreneurial spirit, is the FT’s 2013 Person of the Year because he personifies the Chinese internet with all its growth opportunity.
Since its inception 10 years ago, Alibaba, the world’s most successful e-commerce company, is preparing to sell shares in a global initial public offering that is expected to value the company at well over $100b.
Mr. Ma has been a cult figure in China for years. But he captured the attention of the world this year as excitement built around the impending IPO, which will let investors own a slice of the fastest-growing internet market on the planet.
Alibaba’s sales now exceed those of eBay and Amazon combined and make up about 2 percent of China’s gross domestic product. Seventy percent of all Chinese package deliveries come from Alibaba sales. Roughly 80 percent of Chinese e-commerce transactions are conducted through Alibaba’s sites. And this is probably just the beginning according to the FT, considering more than half of China is still offline. With 600m people using the internet and counting, China will soon overtake the US as the world’s biggest e-commerce market.
The FT considers Ma a China visionary who has recently taken on a leadership role of helping China improve upon its air, water and food quality.
13D Research Comments on China’s E-commerce Boom:
Even though China was ranked at the top of A.T. Kearney’s Global Retail e-commerce index in 2013, its infrastructure sub-index score was a weak 51.1, compared to 99.1 for Japan and 96.5 for the US, making China the lowest of the top 10 countries for logistics infrastructure.
Despite this weakness, wherever there are bottlenecks, there are bound to be investment opportunities. Alibaba recently showed the importance of this through its joint venture agreement with Haier Electronics (highlighted in last week’s KraneShares Capitalvue Weekly). This gave credence to a previous observation by A. T. Kearney in April 2011 that within a few years we expect to see a transformation in China’s e-commerce logistics landscape, where e-commerce plus logistics providers will equal market success.
13D highlighted that compelling investment opportunities can be found in the companies that support and facilitate the rest of the e-commerce industry such as warehouse facilities companies along with transportation and railway companies.
Local Broker Insight:
Haitong Securities:
November nominal growth and actual growth of retail sales were higher than October by 0.4 and 0.6 points, which came in better than estimates.
Urban retail sales growth was higher than rural while retail sales of home appliance, communication equipment, and furniture recorded strong growth. www.htisec.com
CICC: Macro Thematic: Median Interest Rates on the Rise – New Economy Thematic
• The recent spike in market interest rate was to a certain extent driven by temporary factors, but more attention should be given to the fact that China is transitioning from a low interest rate environment caused by interest rate control and a high savings rate to a high interest rate one implied by a falling savings rate and interest rate liberalization
• From a short-term perspective, recent rising interest rates reflect relatively tight overall liquidity conditions amid tightening monetary policy, and against the backdrop of economic stabilization, monetary policy is leaning towards financial risk prevention and management
• In the medium-long term, the median market interest rate faces upward pressure amid interest rate liberalization and economic reform, as the easing or abolition of rules will likely drive up deposit and market interest rates.
• The two major goals of China’s economic reforms are to narrow the income gap and allow the market to play a decisive role in resource allocation, leaving the natural rate of interest with upside risk since investment rate will likely decline less sharply than the savings rate.
• In the short term, rising interest rates should boost consumption as they can increase disposable household income, while in the medium-long term, interest rate increases are a result of rising consumption and slowing investment, leaving the largest beneficiaries to be goods/services consumption and public service. www.cicc.com
CITIC Securities: IPO
The IPO restart will pressure the media sector which has a high valuation. Companies waiting in line for IPOs are mainly those that will list on the SME and ChiNext Boards. We forecast the media sector will trade at a low level at the beginning of 2014 before rebounding later in the year, and there will be divergences in individual share performance. We favor the new media sector represented by the Internet, video content and integrated marketing companies, as well as leading players that are transitioning to digitalization and are carrying out further reform measures. www.citics.com
UBS China Outlook:
UBS Asset Management sees the Hang Seng Index gaining at least 15 percent next year on the back of improving earnings growth in sectors like consumption, internet commerce and non-bank financial firms.
The asset manager expects earnings of companies on the local benchmark to expand around 7 percent next year, with the index to rise to a level between 26,800 and 28,000 points. The Hang Seng Index recently closed at 23,218.12.
“In Hong Kong, conglomerates, banks, gaming operators and capital-goods companies offer growth and income potential as the economic cycle improves,” said the Asia-Pacific regional chief investment officer at UBS. “We think China’s final reform blueprint will be a positive re-rating catalyst for the market”. www.ubs.com
This is not an investment recommendation or a solicitation to become a client of Krane Funds Advisors, LLC (“Adviser”). Unless indicated, these views are the author’s and may differ from those of Adviser or others in the firm. We do not represent this as accurate or complete and we may not update this. Past performance is not indicative of future returns. For additional information and important disclosures, please contact Brendan Ahern at (646) 218-9852 or brendan.ahern@kraneshares.com. This communication is solely for the addressee(s) and may contain confidential information. We do not waive confidentiality by mis-transmission. Contact me if you do not wish to receive these communications.