Cheah Cheng Hye was interviewed at the PwC Asset and Wealth Management Conference 2020. Some notes/highlights below (for personal reference only, any mistakes are my own).

On the implications for Covid-19 on markets and the geopolitical sphere: China, Korea etc. have been among the leading countries in managing a V-shaped recovery while much of the Western world has so far been stuck in an L-shape, with growing fears of a second wave in Europe and US. For the time being, China is monopolizing the show in terms of economics, market action etc. People want to put money to work in Chinese stocks and bonds – his firm Value Partners are seeing more inflows, inquiries. China seems to be crowding out other markets in terms of attracting investors because of its ability to recover so quickly. Chinese factories are doing well, the latest export figures show that. They are also continuing to open up their financial markets, which remains the one bright spot in Sino-American relations. Leading American financial institutions are rushing to get into China, and the Chinese are welcoming them by putting in place reforms to allow foreigners (including Americans) to own up to 100% of asset management and securities companies in China. China will be the one major economy able to produce positive economic growth in 2020 when most other major economies will report declines.

On the effect of geopolitical tensions on China market entry strategies: his experience has been that the governments tend to do their thing, and the private sector does their thing. China is the story, like it or not. Responsible for roughly 35% of economic growth. World’s biggest consumer market. 500m people in the middle class and they need to save, invest and buy financial products. Despite all the political noise, people are moving in. Lot of runway if you look at the Chinese savings picture – it is the largest pool of savings in the world but the majority is tied up in bank deposits, money market products and real estate. Only 10% of Chinese savings are in equities. In the next 10 years, the amount of funds to be managed could increase 3-6x. This will be the major growth driver of the global asset management industry. Major milestone back in April 2020, when China formally opened its doors in financial services to foreign brokers, banks and asset management companies (went largely unnoticed by the media given the focus on Covid-19).

Impact of Sino-American tensions on the rest of Asia: countries are spending a lot of energy trying not to choose sides between the US and China. The US has a major issue now because of the 4 years under Trump; people know they cannot count on reliability and consistency. Biden may well follow a different line, but who knows what happens 4 years later when the next election comes around. Countries are hedging their bets. Like it or not, the Chinese have been far more consistent, signal well in advance in terms of changes of policy. His firm has offices across the Asia Pacific region including in Singapore, Malaysia etc. but the center of gravity is shifting towards China.

The future for capitalism: following the collapse of the USSR, most of the world embraced different types of capitalism, including China. He thinks we are now coming to the end of the road for the most basic form of capitalism, which he terms “winner takes all.” Since the Global Financial Crisis, the form of capitalism that we know best has evolved into a system where big companies dominate many industries and services, in turn stifling competition. The rich have gotten a lot richer, while the poor and middle class have gone nowhere. In HK, for example, there has been no increase in purchasing power for the middle class for at least 20 years. Meanwhile, housing prices keep getting more expensive, making life more difficult for the middle class. Social media is also making people much more aware of the inequalities of the system. Post-2008, governments were forced to intervene heavily in the market, and this has created severe imbalances and deficits. A system with low interest rates benefits people who own stocks and property (the wealthy). System is now beginning to show signs of real trouble. People talking about a new form of responsible/stakeholder capitalism, but this is yet to spread in Asia. Increasing realization that the current system is too focused on short-term results, and is not able to address the big problems of our planet, including global warming, depletion of resources, food scarcity, social unrest etc. The demographic dividend we have been talking about is now a risk because advances in AI, robotics etc. mean there might be fewer job opportunities. The 21st century will be marked by these very difficult issues. The focus also seems to have shifted from wealth creation to wealth distribution.

On the deglobalization trend: he thinks this is irreversible. The “America First” policies under Trump were a symptom of larger forces at work. Many people in developed countries have concluded that deglobalization has not helped them. It has helped multinational companies, but not them. We must accept this trend is undermining the world order that we know so well. Unfortunately, there are only a few winners with deglobalization – you need a domestic market big enough to support the supply chain (including R&D, production, distribution, brand building). This is only true in the US, China and the EU. All other countries are used to surviving by being part of a global supply chain. This is especially true of Southeast Asia, Taiwan, Japan etc. If these business models are on the way to being obsolete, it may create significant social unrest in those countries.

On passporting in the financial services industry in Asia: he thinks that it will take a long time to overcome the problems that prevent passporting from taking off in Southeast Asia. Every country has their own ideas regarding capital controls, tax regimes etc. There is no block advantage that the EU has to build a UCITS equivalent scheme, for example (and even that took several decades to be established). They have found it easier to penetrate these markets by using local feeder funds with specific local approval for a market. Meanwhile, the Chinese are moving much faster in terms of finance integration and with interest rates 200 basis points higher than US dollar interest rates, it has a sucking effect in terms of money inflows. Foreign investors still own less than 4% of the A share market and less than 3% of the bond market, so there is a long way to go. The GBA (Guangdong -Hong Kong-Macao Greater Bay) is an important national development strategy for China. They are starting to experiment with lifting capital controls for the area. His firm may have the chance to on-sell HK products directly to the ~110m people of Guangdong. Having said that, for now it still remains 1 country with 3 systems, so it will take some time to work out.

On other China macro factors: with the RMB, he thinks the Chinese want it to be internationalized, as they are increasingly conscious about the over dependence on the US dollar. But they realize they need to open the gate a bit in terms of capital control so that foreigners are more comfortable holding the RMB. Will continue to see much bigger exchanges between Mainland China and the rest of the world. Their new 5 year plan is really showing the way in terms of long term planning. More of a multi-decade vision than a plan. Between 2010 and 2020, per capita income almost doubled. Between 2020-2035, they want it to double again and then one more time between 2035-2055. The financial markets in China are still very young, the modern stock market as we know it only started in 1990 after having been closed down for a long time. Most of the people working in the industry only started their careers in the late 20th or early 21st century. You commonly see people with 3-5 years experience managing the equivalent of hundreds of millions of dollars. In the west, you would need at least 15-20 years of experience before you were given such responsibility.

On the Chinese market: he talked about the relative youth of the financial markets, reality is lot of people don’t do fundamental research or what he would call “professional” investing. There are over 170m people with registered broking accounts. China is the world’s most active stock market in terms of trading volumes and daily turnover. 80% of daily trading is still small retail traders. More of a casino. Foreign institutions such as his are in different space, looking to invest with a medium to long term view. The difficulty for them is to solve distribution – there are lots of potential customers but how to reach them in a cost effective manner. Distribution in China is still controlled a few players (the major banks, fintech and insurance companies). Requires large economies of scale that most foreign players don’t have, so you typically see them form JVs with domestic players and split the fees. Not sure it’s the best model but certainly the path of least resistance. Things have changed a lot in the asset management industry, especially in the last 10 years or so. He thinks you either have to be very big or very small. You need scale to support best in class research, distribution, compliance and back office capabilities. You don’t want to compromise on these areas because it will affect the quality of the brand. Value Partners needs to become much bigger and China gives them that opportunity. Either that or you just want to be a boutique with only a few customers alongside your own money – just focus on performance and hope for the best in terms of compliance, back office functions etc.