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Straits Times 3,364.87 +4.84 +0.14%
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Dr Chan: OBOR Presents Opportunities; 4 Potential Chinese Sectors
By: Dr Chan Yan Chong
Articles (200) Profile

On October 5 this year, the 12 participating countries of the Trans-Pacific Partnership Agreement (TPP) reached a preliminary agreement. Among the 12 countries were countries from the Americas, Australia and New Zealand, as well as Asian countries like Japan, Vietnam, Malaysia, Singapore and Brunei, but China was conspicuously missing among them.

Considering that Japan and Vietnam are both involved in territorial disputes with China, they would be interested to participate in plans to contain China. Such an interest might be shared by the US.

China’s Real Spending Power & One Belt One Road

Can the TPP keep China in check? One of the most important conditions is how exclusive the TPP will be. In other words, when non-TPP countries trade with TPP countries, are they expected to comply with the collective conditions laid down in the TPP? Will it be like the EU, in which any non-EU country that wishes to do business with any EU country must meet the conditions set down by the EU, including tariffs? Looking at the preliminary agreement of the TPP, it does not seem to be as exclusive though. Thus, TPP member countries can come up with trade agreements among themselves, and they can also negotiate a bilateral trade agreement with China separately.

For now, the TPP has only reached a preliminary agreement, and representatives of these twelve countries will still have to bring it back to their own countries for further deliberation before it can be formally adopted. This is not going to be easy. To begin with, in the United States, Democrat presidential candidate Hillary Clinton has already came out to oppose the TPP publicly.

By the time the TPP is operational, the lure of China’s economic strength and its vast market of 1.3 billion consumers will continue to drive TPP member countries to initiate bilateral free trade agreements with China on their own. In fact, the TPP will not prohibit individual member states to sign bilateral trade agreements with China either.

Over the recent Golden Week, 400,000 Chinese tourists visited Japan and spent a total of 100 billion yen. According to a recent report issued by Swiss investment bank Credit Suisse, there are as many as 109 million persons in China whose net worth is between US$50,000 to US$500,000, surpassing the United States to claim the place of the country with the most number of wealthy people in the world. No country, including the TPP member countries, can afford to ignore China’s 1.3 billion consumers and its 100 million middle-class citizens with real spending power.

Since TPP member countries can sign bilateral free trade agreements with China while enjoying zero tariff among the TPP countries, there is no need for them to forfeit the Chinese market. China already has its own game plan to counter the TPP containment, which is its One Belt and One Road strategy.

Speaking of which, the construction and operating contracts for the high-speed rail project linking the Indonesian capital of Jakarta to the major city of Bandung has finally been awarded to the Chinese. This is an example of the success of China’s One Belt and One Road strategy. There are three reasons why China managed to win the contracts: China’s world-leading high-speed rail technology, a much lower cost of construction than its competitors, and the Chinese government’s readiness to draw from its deep coffers to provide unsecured loans to Indonesia for it to build its high-speed rail.

STI & HSI Yet To Peak

During the stock market crash a while ago, a number of Hong Kong tycoons waded in to buy back shares of their own flagship companies. The reason why tycoons can become tycoons is their ability to see further and deeper than ordinary folks. They are not bothered by short-term fluctuations in stock prices; as long as the stock prices have fallen to a level that they think is worth buying, they will make the call to buy. This clearly means that before the stock market crashed, shares were already overpriced. I have been warning everyone over my past few articles of this very fact even then.

Singapore’s Straits Times Index and Hong Kong’s Hang Seng Index have rebounded by more than 10 percent. Some people think that it is just a rebound triggered by people covering their short positions while others felt that it was an indication that the investing environment has improved. For the time being, the reason for the rebound does not matter, because even if it was brought on by investors covering their short positions, I believe the market has yet to peak.

The reason is that when the rebound had just started, many fund managers still did not believe that the market has already bottomed out; they are now forced to cover their short positions in order to avoid being outrun by the market, which happens to be their greatest nightmare.

When the market first showed signs of a rebound, some fund managers did not believe that the market has already turned and they took advantage of the rebound to reduce their holdings or sold short, only to find themselves seriously out-maneuvered. Now these fund managers are forced to take remedial actions by chasing after the market.

US Fed Rate Hike Won’t Happen Till After Elections

Sentiments in the stock market are becoming more positive as investors adjusted their expectations of the US interest rate hike. On October 8, the Federal Reserve revealed the minutes of its rates meeting in September, which showed its board members mostly tending towards the view that they should not raise interest rates when the US economy is still on shaky grounds, and that any rate hikes must be considered cautiously. This has further strengthened investor confidence.

Now, the general consensus in the market is that the Fed is unlikely to raise interest rates this year, and since 2016 is the year of the US presidential election, a rate hike will become a sensitive political issue if it happened then. Therefore, unless absolutely necessary, the US is not about to raise interest rates.

PBOC Gave Banks Power To Decide, Not QE

What the market is worried about now is a recession, in particular in China. Today, China’s gigantic domestic market is able to shape the international economic situation. China’s recent manufacturing slowdown has already caused prices of natural resources around the world to fall.

When the People’s Bank of China announced that it would expand a pilot program allowing banks to refinance high-quality credit assets, some likened the move to a Chinese version of quantitative easing. Actually, this is not completely true. QE4 was an initiative taken by the Federal Reserve to buy up bonds every month; China’s refinancing measure puts the initiative in the hands of banks – if they believe that there is a need, they are able to tap on refinancing facilities to increase their liquidity and do more business.

As a result of the flexibility of this strategy, as well as the onus on the banks, it is not easy to estimate its overall impact on the macroeconomy. What is certain is that it is definitely favourable to China’s banking sector, for now banks will have the ammunition to be on the offensive when the market rises and to defend their positions when the market falls.

Investors’ Takeaway

The future of China’s economic development lies in the hands of the middle class, whose willingness to spend money will make up for the loss of high-end spending as the central government continues to fight corruption among its senior cadres. The Chinese middle class likes to travel, engage in leisure activities and shopping, and have a modest appetite for high-end brands. In order for them to travel and have fun, they need to have a set of wheels. Therefore, in the long term, (1) Chinese auto shares have a promising future. Apart from buying properties to stay in, the Chinese middle class will also invest in rental properties, so (2) Chinese property counters also look very promising.

The 100 million-strong middle class market presents a world of opportunities for speculative stock investing. One more area to consider is the (3) retail sector – the middle class loves to shop, be it in malls or online. Recently, retail stocks are languishing in the doldrums, thus presenting a great opportunity for some stocks shopping and bargain hunting. Two (4) online merchants are worth looking out for: the US-listed Alibaba, and Tencent Holdings (0700). I have traded Tencent shares several times, and every time I sold, I would regret the decision soon after. My most recently purchase was made last year, and I am holding on to it still.

I prefer long-term investments, but more people prefer short-term speculations. To each their own, I say, since there are more than one road that leads to Rome.

Still worried about when and how much would the US Federal Reserve hike interest rates? Do you have burning questions that you want to ask regarding the China economic slowdown and SHCOMP nosedive in June? Are you confused if any of the external factors from other countries in Asia will affect your Singapore stocks portfolio?

Catch renowned investors and speakers with rich experience in the stock markets, who have had witnessed multiple stock market crashes and global recessions over the years at Shares Investment Conference 2015!

Speaker profiles

1. Dr Chan Yan Chong, a renowned investor with more than 25 years of experience and the MBA programme director & associate professor of business school at the City University of Hong Kong.

2. Kevin Gin (CFA), the Founder and Principal of Alpha Capital. He was the former COO for CITIC Securities, Head of Singapore and Regional Real Estate Research for Kleinwort Benson Securities Asia (now part of Credit Suisse) and Head of Greater China Property Research with Yuanta Securities (Hong Kong)

3. Louis Wong, one of the most experienced fund managers in Hong Kong. He has over 25-years of solid experience and track record in the financial market. He was awarded Best Financial Analyst for 3 years by the Putonghua Channel of Radio Television Hong Kong and is also a part-time instructor of several investment courses in various Hong Kong universities.

4. Daniel Loh, an investment coach that specialises in equities and derivatives trading, he appears regularly on local TV financial programmes like “Good morning Singapore” and “Hello Singapore”.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.


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