Brendan Ahern, CIO of KraneShares, sat down with Steve Wang (汪洋) deputy director of passive investment for Shenzhen-based Bosera Asset Management. Bosera is the asset management arm of China Merchant’s Bank, one of the oldest and largest banks in China1. Bosera has $38 billion assets under management as of 12/31/20142. The firm is the sub advisor for the KraneShares Bosera MSCI China A ETF (ticker : KBA).
Steve joined us in New York City after a visit to Omaha, Nebraska where he attended the 50th anniversary of the Berkshire Hathaway shareholder meeting.
Steve shared his perspective on the historic bull market occurring in the onshore China markets. The rally in the onshore market began in the second quarter of 2014 and has since gained 128% as of 4/30/20153. Steve also discussed the internationalization of China’s currency the renminbi (RMB), China’s One Belt One Road plan, and Warren Buffet’s comments on investing in China.
Brendan: China’s GDP is still growing though not at the double-digit rates we’ve seen in past years. Can you provide your views of China’s economy today?
Steve: China is a developing country that is currently enacting reforms driven by its new government. The economy is transitioning from being predominantly manufacturing based to being a healthier balanced economy with a focus on domestic consumption.
The government refers to this current stage of development as the “new normal”. The GDP growth rate may be slowing, but it is based off an economy that has grown so much already that a 7% or even 6% growth rate is still incredible.
Brendan: The new leadership came into office with a reputation for being reformers. Can you speak to the reform agenda?
Steve: China’s leadership is dedicated to liberalizing its economy and allowing natural market forces to prevail. One area of focus the leadership has in this regard is unlocking shareholder value in state owned enterprises (SOEs). The goal is to drive efficiencies and help SOEs compete internationally.
While there are reforms focused on the economy there are also reforms to benefit society such as greater healthcare and social security access. The government wants to make China a better place for its citizens.
Brendan: The onshore equity market has been one of the best performing stock markets globally. What is driving the market today?
Steve: There are three key points: First, economic cycles dictate there will be bull and bear markets. Right now we are in a bull market.
Second, mainland investors have positive expectations for the reform agenda. Investors are confident in the government’s ability to successfully enact reforms. This may be the primary driver of the strong performance.
The third key point is that liquidity is coming back into the market. Historically, Mainland Chinese investors primarily put their money into housing and shadow banking; this is no longer the case. At this point housing is not going up, people do not generally expect further gains from housing so the money needs to go somewhere else. In China the investment channels are limited, the mainland markets have been performing well and investors in China are increasingly seeing this as the best place to put their money.
Brendan: The onshore markets are up 128%, where do we go from here?
Steve: One shouldn’t expect the market to solely rise. There are different market segments that could see divergent performance. The small cap market may be over priced with high price to equity ratios, which could adjust over time. However we believe the blue chips are still reasonably valued. The blue chips are a big percentage of the market so we believe the market should continue to do well.
Brendan: Why do you believe the government is so interested in supporting the onshore stock markets?
Steve: The government has supported the stock market as it helps with their domestic consumption efforts. If investors are making money in the stock market they are more prone to spend money. The government wants to balance the economy through support. Historically a lot of money went into the credit market instead of the stock market. The government does not want to create liabilities through credit expansion.