China: Current Investment Themes
Reforming State-Owned Enterprises
DAVID LAI: I think many people who talk about China focus only on the GDP data. They ignore all the other things that are growing very rapidly and healthily in China. One of the significant reforms that we are talking about is state-owned enterprise reform. There are a lot of industries that are highly restricted from private capital right now. Most of these industries are dominated by state-owned enterprises, however, our research says that there has been a big gap in ROE between state-owned enterprises and private enterprises. State-owned enterprises have an ROE average of around 12%. Private enterprises have historically had an ROE of around 27%. Consequently, there is a lot of pressure for the state-owned enterprises to improve their financial performance. That is our expectation going forward. SOEs may sell some of their assets on their balance sheets to unlock value. They may also merge with other state-owned enterprises to increase their market shares. Finally, they may inject some assets into the listed vehicle so that the overall listing company may potentially have stronger profitability and higher market share. I think this will help drive the economic growth in China going forward.
Increasing Labor Costs and Moving Towards Automation
LAI: Regarding automation in China, I think there will be high demand going forward. The reason is that China has been a well-known manufacturing center of the world. A lot of exporters and manufacturers have been building factories and hiring laborers in past decades. Right now they are all facing a similar problem: increasing labor cost and labor shortage. How will they tackle the issue? When we talk to many listed companies, they tell us they are trying to increase the level of automation at the production site. I would expect high demand for automation equipment implemented in the production line. Some software companies may benefit from the integration between the equipment and the production line and some parts of component companies may also benefit from this change.
China is a very policy-driven market and the policy is focused on specific areas such as clean air and clean water, and one could get a very interesting outlook in terms of the aspirations of people in China as they get wealthier. Whether these aspirations entail education, health care, travel, or even social media, they all have structural growth profiles.
Views on the Health Care Sector
LAI: I believe the health care sector will enjoy very significant growth in the next few years' time. China has a very young population of 1.3 billion. However, it is aging very rapidly due to the one child policy implemented 30 years ago. Right now we see that the government has been increasing the spending or the funding to provide better medical coverage for the mass market. Besides, a lot of insurance companies are also introducing health care-related policies to their customers. We expect that the demand for medical checkups, outpatient services, private hospitals, pharmaceuticals, and Chinese medicine will be quite substantial in the next few years.
- - - - - - - - - -
The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in an Index.
Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Principal risks of investing in China include, but are not limited to, political and economic instability, inflation, confiscatory taxation, nationalization and expropriation, market volatility, illiquidity, currency fluctuation and devaluation, actions taken by the Chinese government in the markets, less reliable financial information, differences in accounting, auditing, and financial standards and requirements from those applicable to U.S. issuers, and uncertainty of implementation of existing Chinese law.
Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. Bonds and bond funds will decrease in value as interest rates rise. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © 2014 Van Eck Global.
Van Eck Securities Corporation, Distributor
335 Madison Avenue, New York, NY 10017