9 facts about the Chinese economy. What to consider when analyzing companies from the Hong Kong stock exchange

9 фактов о китайской экономике. Что учитывать при анализе компаний с Гонконгской биржи

9 facts about the Chinese economy. What to consider when analyzing companies from the Hong Kong stock exchange

Second place in the world in terms of GDP

According to the International Monetary Fund (IMF), China is the second economy in the world: its annual GDP is $13.4 trillion. In the first place is the United States - GDP of 20.49 trillion dollars, and on the third Japan - GDP of 4.97 trillion dollars.

According to some calculations, by 2030, China will occupy the first place, and the U.S. will go to the second. But you still need to live to see that..

No longer a developing country

Everyone is used to thinking of China as a country with a high rate of economic growth . 10% and more per year, — but in recent years, as the PRC develops, the growth rate has begun to slow down: in the noughties, annual growth was on average about 13%, and now it's closer to 5%.

Therefore, one must take into account, that certain sectors of the economy, such as conventional retail, will be less attractive to investors, but the technology sector will still show high growth rates.. Similar situation in Russia: recent 9 The country's economy has been shrinking for years - in 2013 Russia's GDP was 2.29 trillion dollars, and in 2021 - 1.78 trillion, but fintech companies, eg TCS Group, or technology businesses, for example "Yandex", showed high growth rates during this time.

9 facts about the Chinese economy. What to consider when analyzing companies from the Hong Kong stock exchange

Low level of legal development

According to a number of parameters, the PRC is a state, far from Western standards. This concerns the policy and independence of the judiciary..

In the Rule of Law Index (Rule of Law Index, RLI), measuring the level of development of the rule of law, China is on the 98th place, even lower than Belarus (97) with Uzbekistan (85) and just above Russia – 101st place.

This should be taken into account when investing in Chinese stocks.: in our review of the defeat of Alibaba by the Chinese government, we clearly saw, that this state of affairs affects the business environment.

The service sector and the digital economy are growing fastest

IN 2010 55% China's GDP accounted for very labor-intensive sectors: industry, construction and mining. Now their share is 38%, and the share of the services sector has increased since 44 to 55%.

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The growth of labor productivity in the service sector in the PRC is ahead of the growth of productivity in industry, and the growth of the digital economy in this country is ahead of the growth of its own GDP.. This is facilitated by the fact that, that the Chinese government is actively involved in financing Chinese startups: in the period 2015-2021, venture funds under the management of the state collected almost a trillion dollars from investors, and these funds account for a third of all venture capital and private equity.. So the development of software and high technologies is a national project in China..

Therefore, it makes sense to look primarily at high-tech companies on the Hong Kong Stock Exchange..

Producing in China is no longer as profitable, like before

American companies used to actively transfer production to China, but now they are actively transferring it from China to the United States. This is influenced by several factors..

Firstly, wages in China are growing and the advantage of the Chinese compared to American workers is no longer so striking., like before: if in the mid-1990s 40 Chinese workers received the same number, how much is one american, now this gap has narrowed to about 10 once: one American worker gets as 4-5 Chinese.

Secondly, American companies want to be closer to their markets, and it's mostly the U.S..

The withdrawal of Western industries from China will force the Chinese government to develop industries with "high added value", that is, technology. In parallel, this may have a negative impact on Chinese manufacturing companies., in the chain of clients of which there may be many Western companies or their local Chinese outsourcers.

The confrontation between the United States and China will continue

America is most interested in suppressing the Chinese high-tech sector. We all remember the story of sanctions against the Chinese technology giant Huawei, which the Americans expelled from the Western market. Recently, the State Department planned to ban American semiconductor companies from exporting the most high-tech equipment to China..

U.S. Regulators Make Life Harder for Chinese Issuers in the U.S., limiting their ability to receive money from Western investors. A number of large Chinese technology companies were subjected to sanctions for participating in the projects of the Chinese government in the troubled Xinjiang.

Probably, the American onslaught on the Chinese economy will increase – as in the form of complicating the lives of individual bright companies like Huawei, and in the form of sectoral sanctions. This will be bad for technology companies from the Hong Kong Stock Exchange..

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Coronavirus restrictions in China are among the toughest in the world

China is known for its toughest coronavirus lockdowns, which are introduced without regard to the economic consequences. Therefore, another sudden quarantine in China can greatly spoil the reporting of many issuers..

9 facts about the Chinese economy. What to consider when analyzing companies from the Hong Kong stock exchange

Chinese prefer to invest in real estate

Unlike the U.S., The Chinese prefer to invest in real estate, which led to a monstrous overheating of the real estate market and the collapse of the business of the developer Evergrande, which threatened to bury the entire Chinese economy. That didn't happen.: the Chinese government intervened in time and is now pursuing a strict policy of restriction.

But that doesn't mean, that it's all over: This year, Chinese developers will have multibillion-dollar payments on dollar debts, so massive defaults of developers, which can cause an economic crisis in the country, still possible.

Very low quality Chinese statistics

Economic data from China is periodically falsified by the government, and at best, they are not working on their analysis in the PRC very carefully..

So for a more complete assessment of Chinese economic performance, it is worth reading Western analytics., although the authors there are often unfavorable to China - but, at least, truth can be found in the middle.

You need to look at Chinese economic statistics, to understand, which sectors are doing better this season and, respectively, in the reporting of which companies you can hope for pleasant surprises.

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