Why you need to pay attention to
Great things come from small beginnings. The NASDAQ stock market is a case in point. It was created in 1971 to increase efficiency and transparency in the> READ MORE
Great things come from small beginnings. The NASDAQ stock market is a case in point. It was created in 1971 to increase efficiency and transparency in the> READ MORE
Music streaming is now a US$10 billion-a-year industry made possible by the advent of high-speed mobile internet and smartphones. These subscription-based services> READ MORE
China leapfrogged from the bicycle age to the automobile age in just 20 years. Before 1994, most people in China were still getting around on bicycles. Some people> READ MORE
It wasn’t the first cannon firing – but it may as well have been. On March 22, U.S President Donald Trump announced tariffs on US$60 billion worth of Chinese> READ MORE
Earlier this year, U.S. e-commerce behemoth Amazon (New York: AMZN) opened its first cashierless store, called Amazon Go, in Seattle, in the northwestern state of> READ MORE
Contrarian investing is one of the most popular investment strategies in the stock market (which of course is a contradiction). So it’s by definition misunderstood> READ MORE
Late last year, a reporter challenged China’s government to use its surveillance systems to find him in the chaotic streets of Guiyang City’s 5 million> READ MORE
No one wins in a trade war. Or… at least the participants don’t. But there’s plenty of scope for observers to benefit. I’ve written a lot about the trade> READ MORE
Great things come from small beginnings.
The NASDAQ stock market is a case in point. It was created in 1971 to increase efficiency and transparency in the over-the-counter (OTC) securities market. These stocks typically did not meet the listing requirements for the New York Stock Exchange (NYSE).
The NASDAQ didn’t have a big building with a trading floor with an open outcry system (where traders and dealers shouted their orders at each other) like the NYSE. It was a purely electronic exchange. And it expanded rapidly.
Today, the NASDAQ is the world’s second-largest stock market, with a total market capitalisation of US$10.8 trillion. It’s home to some of the world’s largest publicly-traded companies, including Apple, Google and Amazon. These three companies alone have a combined market cap of US$2.3 trillion – worth more than the economies of Brazil or Canada.
And we could be about to see the beginnings of a similar exchange in China…
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China’s markets have a lot of room for growth
Right now, China has two stock exchanges – one in Shanghai and another in Shenzhen. They’re small compared to their U.S. peers, with a combined market cap of roughly two-thirds of the NASDAQ and approximately one-fourth of the NYSE.
But they have a lot of potential growth.
China is already the world’s largest market for technology. It has the biggest number of internet and mobile phone users of any country in the world. The number of Chinese using social media, online gaming and video streaming is many times larger than the U.S. And China is rapidly transforming into a digital economy, with cashless payments and facial recognition common in most major cities.
Yet, it’s been losing out in the technology IPO market. Many technology companies have chosen to list on the Hong Kong Stock Exchange or the NASDAQ.
Chinese tech firms Tencent Holdings, Alibaba and Baidu – with a combined market cap of over US$800 billion – are all listed outside China. The country’s largest mobile phone manufacturer, Xiaomi, listed its shares in Hong Kong back in July. We also recent wrote (here) about the Spotify of China, Tencent Music, which is looking to list shares on the NASDAQ this month.
China wants a piece of the action
China will be launching its own version of the NASDAQ exchange in Shanghai early next year.
In an effort to attract future tech giants, there will be no profitability requirement for listed companies, compared to the current requirement of a three-year record of profitability. They also plan on adopting a NASDAQ-style IPO filing system that can be done online, making it easier for companies to file their requirements and speed up the approval process (which currently takes up to two years).
The exchange will start accepting IPO applications in March, and plans to start trading the first batch of listed shares in June.
This could be a huge market. According to China Money Network, an artificial intelligence-based platform tracking China’s smart investments and technology innovation, there are now 127 “unicorns” in China. Unicorns are unlisted companies that carry a value of at least US$1 billion.
Moreover, China has 20 unicorns with valuations of at least US$5 billion. The three largest include Ant Financial (US$150 billion), Aliyun (US$67 billion) and Didi Chuxing (US$57 billion).
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Ant Financial is Alibaba’s electronic payments business, and now the world’s largest mobile and online payments platform. Aliyun is Alibaba’s cloud computing services business. And Didi Chuxing is the dominant ride-hailing services company in China, which all but kicked out Uber from the market last year.
Getting Chinese companies to re-list
The majority of China’s biggest publicly-traded technology companies are currently listed in the NASDAQ via American Depository Receipts. This puts them out of reach of the average Chinese investor, who’s restricted from investing outside of China as a result of Beijing’s tight capital controls.
But with the new stock exchange in Shanghai, Beijing plans to use the Chinese Depositary Receipts (CDR) system to lure some overseas-listed mainland technology companies to re-list on the local market.
Under the CDR system, a bank acts as a middleman broker between a foreign-listed Chinese company and local Chinese investors. This middleman is known as the depositary bank, holding the shares in a trust, and then offers a new security to the local market.
For instance, Alibaba takes 10 percent of its outstanding U.S.-listed shares and puts them in a trust with the Bank of China. The Bank of China then creates a new security based on these shares, and offers them to local Chinese investors at a price reflective of the U.S.-listed shares’ value.
This will reduce the availability of shares (making them scarcer) on the NASDAQ, and creates a new market for them in China. This will likely lead to sharply higher prices for investors in affected U.S.-listed Chinese stocks.
So it won’t happen overnight, and China’s NASDAQ will surely have a lot of growing pains along the way to becoming a formidable stock exchange. But it’s going to happen. Over time, this exchange could be one of the biggest in the world.
Editor, Stansberry Pacific Research
Music streaming is now a US$10 billion-a-year industry made possible by the advent of high-speed mobile internet and smartphones. These subscription-based services have breathed new life into a once-declining music industry, with revenues six times larger than the amount spent on physical music albums.
It’s already given rise to Spotify (Exchange: New York; ticker: SPOT), which has more than 83 million paying users around the world.
The company is now worth US$25 billion – making it more valuable than United Airlines (the second-largest U.S. airline) or Hyundai Motors (the world’s third-largest car maker).
Spotify also has a big rival, in China – one that’s about to become a public company on December 12.
Much more than China’s Spotify
Tencent Music Entertainment Group is the online music-streaming arm of Tencent Holdings (Exchange: Hong Kong; ticker: 700), China’s largest internet services and entertainment company with a US$383 billion market cap.
Tencent Music hopes to raise US$1.2 billion, offering 82 million shares at a price somewhere between US$13 and US$15 a share. That would give the company a market cap between US$21 billion and US$24 billion.
Tencent Music generated US$1.66 billion in revenues last year, compared with US$1.13 billion for Spotify. It also made an operating profit of US$229 million last year, while Spotify lost US$340 million.
But Tencent Music generates just 30 percent of its revenues from streaming music services like Spotify’s. The bulk of its revenue (US$1.16 billion) last year came from social entertainment services that are unique to China’s enormous active online community.
Virtual gifts are big money
These social entertainment activities involve live-streaming a user’s vocal performance via a karaoke-like app, called WeSing, to friends and random viewers. Users are also able to send virtual gifts as reward to others for good performances.
One unusual feature about Tencent Music’s social entertainment service is that users get a percentage of the cash value of the gifts they receive.
Other similar social video streaming services even allow users to convert virtual gifts into cash (at 50 percent of the original value). And there have been cases where some users have received gifts of upwards of US$90,000.
The company states that it had almost 10 million paying users for its social entertainment business as of end-June 2018. That would indicate an average revenue per user of US$16.09, which is 12 times higher than its music streaming business.
Has Tencent Music stumbled on a much more profitable business model than the world’s online streaming music pioneer? Perhaps.
It still pays to wait
It’s easy to get excited about an IPO, especially one that bears a lot of similarity to a successful company that people are already familiar with.
Spotify listed its shares in April 2018 at US$132 each. It opened its first day 25.6 percent higher, and went as high as US$199 a share by July. But since then, it’s gone back down to US$139.
So if you’d bought Spotify’s IPO, at worst you would be up 5 percent in eight months. And if you were lucky (and smart) enough to sell at the high, you could have made 50 percent in just three months.
Given the relatively encouraging performance of Spotify since its IPO, Tencent Music is likely to attract a lot of investor attention.
But buying the hype is almost always a recipe for incurring unnecessary losses.
It often pays to wait for the company to go through at least two rounds of earnings after its IPO. This gives you the chance to see whether the company is on track to meet its optimistic goals set out during the initial offering.
It also gives you time to find the answers to some of the lingering questions about its business that may not have been addressed when it first listed shares.
Recent IPOs have performed well
While past performance is never an indication of future performance, especially in the stock market, it’s also worth looking at how recent Chinese IPOs have done in the U.S. market. After all, if people are doing well from past IPOs, there’s a higher likelihood they will be eager to buy the next one.
Looking at the five largest IPOs of Chinese companies in New York so far this year, investors have reason to be optimistic.
So the largest Chinese IPOs have done well this year.As you can see in the table above, three of the five posted gains on their first day of trading, with two (Pinduoduo and NIO) rising by 40 percent and 75 percent, respectively. And as of today, four of them are showing gains from their IPO prices.
This doesn’t mean Tencent Music’s IPO will be a winner right out of the gate.
It’s also important to consider how the general markets are doing. When the stock markets are rising, IPOs have the wind to their backs and tend to do better. But when the markets are falling, as they have been lately, poor sentiment can hurt an IPO’s performance.
In these situations, sometimes the best thing to do is nothing at all. While waiting might cause you to miss out on some gains at the onset, it helps you avoid potentially large losses in the event the company fails to deliver on expectations.
China leapfrogged from the bicycle age to the automobile age in just 20 years.
Before 1994, most people in China were still getting around on bicycles. Some people even had motorised scooters.
Fast forward 15 years, and China had dislodged the U.S. to become the world’s largest car market – with 13.6 million in unit sales per year.
Today, China is by far the world’s largest car market, with 28.8 million in unit sales (both passenger and commercial vehicles) in 2017. That compares to the U.S. with 17 million in unit sales. (We’ve written about China’s car market before here and here.)
Now, China’s automotive market is leapfrogging into to the age of the electric vehicle.
Around 2009 – when Tesla Motors (Exchange: New York; ticker: TSLA) delivered its first small batch of all-electric Roadster cars in the U.S. – the Chinese government saw that electric vehicles could address two pressing problems. The first was the country’s dependence on (mostly imported) fossil fuels. The second was deadly levels of air pollution caused partly by by too many gasoline-powered cars on the road.
China’s government wanted to promote the development of the domestic electric vehicle industry. So in 2010 it launched a trial programme to provide manufacturers with incentives of nearly US$9,200 for every battery-powered car sold in the cities of Shanghai, Shenzhen, Hangzhou, Hefei and Changchun.
Soon, Chinese auto manufacturers were scrambling to develop better, faster and more affordable electric cars. These are known in China today as new energy vehicles (NEVs).
It took a few years to take off. In 2011, just 8,159 NEVs were sold. The total number of NEVs sold the following year jumped 56 percent to 12,791… and by 2014, it had grown nearly six-fold to 74,700 units.
By 2015, there were more than 20 different models of NEVs being sold in China. (The imported Tesla Model S, which retailed for well over the equivalent of US$100,000 after taxes, was one option.) That year, 331,000 NEVs were sold. Even though that was just 1.3 percent of the total cars sold in China, it was a 41-fold increase in annual sales within just four years.
Last year, over 777,000 NEVs were sold in China. That was a 53 percent jump from the previous year. Overall, China now accounts for two-thirds of total sales of NEVs.
And China’s NEVs give Tesla’s best-selling luxury cars a run for their money. They offer a host of safety features, including high-end stereo systems, digitised dashboards that can change colour (depending on your mood) and complete connectivity to the internet.
The Chinese government wants electric vehicles to account for 10 percent of total vehicle sales in the country by 2020, and 20 percent by 2025. That’s a target of 5.8 million in annual sales of NEVs, which would be a 640 percent increase from last year’s total.
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The government is helping with additional subsidies. In 2013, the National Development and Reform Commission (NDRC) – which oversees the country’s finance, science and industry ministries – announced a maximum buyer subsidy of US$9,800 toward the purchase of an all-electric passenger vehicle. So instead of paying manufacturers for NEVs sold, the government was now enticing consumers with generous rebates.
Of course, electric cars and buses require charging stations. So in September 2015, the NDRC said it would order the State Grid Corporation of China (their electric utility monopoly) to build a nationwide charging-station network. Its aim by 2020 is to meet the power demand of nearly 10 million electric vehicles.
This network will include up to 500,000 charging stations and cover residential areas, business districts, public spaces and inter-city highways. As of last year, China already had 214,000 charging stations installed. That was an increase of 51 percent from 2016. So they’re on track to reach their goal.
The government will also require new residential complexes to build charging points or assign space for them. At least 10 percent of public parking will need to have charging facilities.
Then in 2016, China’s Traffic Management Bureau introduced “green license plates” to differentiate NEVs from normal petrol-powered vehicles.
Cars with these green license plates enjoy preferential policies. These include exemptions from measures that ban the use of cars to one day each week. In some selected cities, green license plate vehicles can use the bus lane during rush hour.
Probably the most effective support for NEVs is the vehicle quota system. It was implemented in heavily-congested cities in 2011.
Not everyone who wants a gas-powered car in China can just buy one and start driving it. In Beijing, for instance, the government is limiting the number of new petrol-powered cars to hit the streets to just 40,000 a year.
It’s estimated by the Beijing City transportation authorities that every time a new license plate becomes available, 2,000 people are waiting in line for it. They might have to wait as long as five years. And those license plates now cost US$14,300 each. That’s almost the price of a new car.
This dissuades consumers from buying a petrol-fuelled car and encourages them to buy an electric vehicle instead. NEVs have a much higher quota (and sometimes no quota at all) than petrol-fuelled cars. And of course, government-backed discounts can be as much as 40 percent of the sticker price.
With such strong government support, a booming network of charging stations and competitive prices, it’s almost a certainty that NEV sales in China will continue to soar.
So if China’s electric vehicle industry isn’t on your radar yet, it should be.
Editor, Stansberry Churchouse Research
It wasn’t the first cannon firing – but it may as well have been.
On March 22, U.S President Donald Trump announced tariffs on US$60 billion worth of Chinese goods coming into the U.S. The Office of the U.S. Trade Representative had just days before concluded an investigation into China’s trade practices that supported the measure.
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Since then, trade tensions have ramped up. The U.S. and China have implemented tit-for-tat tariffs on US$50 billion of exports from each side, and are on the brink of slapping tariffs on hundreds of billions more worth of exports.
Investors have been worried about the potential fallout of a trade war on the economies of China, the U.S., and everything in between. We’ve written previously about what the consequences of the trade war could be (see here, here and here).
Now, after six months, the impact on global markets is clear. And we have a better idea about the future impact…
The impact of the trade war on China’s economy, thus far, seems minimal – and, oddly, looks to be the opposite of what you might expect.
Chinese exports continued to grow nearly 10 percent year-to-year in August, down slightly from 12.2 percent growth in July. And China’s trade surplus (the excess of its total exports over its total imports) with the U.S. hit a new record of US$31 billion in August.
So in the short term, Trump’s tariffs are having the exact opposite effect on trade. China is exporting more to the U.S. – not less.
Now, one possible explanation is that U.S. buyers may be stockpiling Chinese imports ahead of additional anticipated tariffs.
Chinese exports to the U.S. were also likely bolstered by the 8 percent devaluation in the Chinese yuan since March 22, which significantly offset the impact of tariffs already in place… and further cheapened those products not yet taxed by the Office of the U.S. Trade Representative.
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But stock markets anticipate – they reflect expectations, rather than the present. And markets appear to be anticipating a slowdown in the earnings of Asia’s companies – as reflected in the 8.2 percent decline in the MSCI Asia ex-Japan Index since March 22. China’s Shanghai Composite Index has also dropped 20.3 percent. By comparison, the S&P 500 has gained 10.5 percent over the same period.
By this measure, China is losing, the U.S. is winning. China has a lot more to lose in this trade war than the U.S., because China exports goods worth US$530 billion a year to the U.S. On the other hand, it imports just US$187 billion of U.S. goods annually. So China’s scope to retaliate is limited.
As shown in the graph above, other markets that have been the region’s worst-performers since the trade war began include Vietnam (down 17.8 percent), Singapore (down 9.5 percent) and Hong Kong (down 7.6 percent). All of these countries have economies that are significantly tethered to China’s performance, so a potential Chinese slowdown could be detrimental to their economies.
The strong performers in Asia since the trade war have been India and Australia. India, in particular, has seen its economy strengthen on the back of economic reforms and soaring domestic consumption, with GDP growth hitting a blistering 8.2 percent in the first quarter of the 2019 fiscal year.
But it’s important to note that the trade war is also one dynamic of the stock market. As I said earlier, the stock market reflects expectations of corporate earnings, the local economy, interest rates, exchange rates and a broad range of other markets. The evolving trade war is an important input, but only one of many.
So what specific Asian sectors are being hit the hardest – or benefitting from the trade war?
As the graph below shows, the energy and utilities sectors of the MSCI Asia ex-Japan index have outperformed, rising 5.4 percent and 0.9 percent, respectively. The telecommunications sector has declined just a modest 0.9 percent.
But as you can see, sectors heavily dependent on the global trade and supply chain performed the worst. These include the consumer discretionary (i.e., leisure products and automobiles), information technology and industrials sectors.
President Trump now says he wants to slap tariffs on Chinese exports that have not yet been affected by the trade war (estimated at US$267 billion) as soon as possible. So the same markets and sectors that have done well over the last six months will likely continue to outperform well. And the sectors that have done poorly will likely continue to underperform.
So in this deteriorating trade environment, you want to have more exposure to Australian and Indian stocks. And based on recent performance, the energy, utilities and telecommunications sectors will likely continue to outperform.
Editor, Stansberry Churchouse Research
Earlier this year, U.S. e-commerce behemoth Amazon (New York: AMZN) opened its first cashierless store, called Amazon Go, in Seattle, in the northwestern state of Washington. Customers scan their phones when entering the store.
Then, with sensors, artificial intelligence and cameras, Amazon tracks what customers are purchasing, and charges them accordingly, without ever needing to check out. Another store is in the works.
That seems pretty exciting and revolutionary. But if you want to see future of retail, go to Shanghai.
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In the Daning Music Plaza commercial building along Wanrong Road in Shanghai’s Jing’an district, you’ll find the Hema Supermarket.
Using a customised app, you scan a code on the product you want, through which you’ll be charged for the purchase – and the product will be delivered to your house in half an hour. There’s a human cashier available in case you want to pay with cash.
There are already more than 40 Hema Supermarkets in operation, with another 2,000 planned in the next three to five years.
If you’re in need of new exercise gear, visit Suning Sports’ store along Handan Road. An app on your smartphone – containing your payment information and facial features – will enable you to enter the shop and you’ll be automatically charged as you walk out.
Suning Sports has two cashierless retail stores, with another four being set up. If it proves successful, the company has another 1,500 retail stores all over mainland China to implement its new shopping concept.
For smaller, last-minute needs, you can duck into one of dozens of BingoBox cashierless convenience stores located all around the city. Scan a code at the door using your Alipay or WeChat app to get you into the store.
Alipay is the mobile wallet and payment app of China’s leading e-commerce company, Alibaba (Exchange: New York; ticker: BABA). WeChat is the dominant Chinese social media and messaging app – it’s like Whatsapp, Amazon and PayPal all rolled into one – owned by Tencent (Exchange: Hong Kong; ticker: 0700).
Cameras equipped with facial recognition software follow you around the BingoBox store. Scan the barcode of the items you select as you leave and pay through your Alipay or WeChat app with a few taps, then exit the door, as cameras check what you’re carrying matches what you paid for.
JD.com (Exchange: New York; ticker: JD), the second largest online retailer in China after Alibaba, reported in December that it will team with real estate developer China Overseas Land & Investment to open hundreds of unmanned retail shops.
JD.com will also make use of advanced facial recognition software to customise promotions based on a customers’ shopping habits and demographics. Its trial shops have already been tested by the 10,000 employees at its Beijing headquarters.
Thanks to a boom in robotics, robots are quickly making inroads into hospitals, pharmacies and health research centres.
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How are Chinese companies racing ahead in the next generation of retail shopping experience? It boils down to the data – enormous quantities of data that’s being collected from Chinese consumers by Alibaba, JD, WeChat and others – and the use of artificial intelligence (AI) to mine this data to put it use.
We’ve written previously (here and here) about how China has become a centre of development for artificial intelligence, thanks in part to the vigorous support of the Chinese government. The government makes clear that it works with private companies to gain access to data for monitoring of its citizens.
Kai-Fu Lee, a world-renowned AI expert who founded U.S.-China venture capital firm Sinovation, and led Google in China before it left the country, said at the TechChrunch Disrupt San Francisco startup conference last week that any lead America’s tech industry may have enjoyed is rapidly being eroded by hungry Chinese entrepreneurs. The Chinese have far more data at their disposal to build, train and deploy AI systems – partly because privacy concerns that limit the collection of data in the west aren’t a major concern in China.
With so much data at their disposal, he said that China is using AI to find every way to add value to traditional businesses, to internet, to all kinds of spaces. This is why the most valuable AI companies in computer vision, speech recognition and drones are all Chinese.
Their success at winning over consumers is most evident in the growth in China’s e-commerce industry over the past five years, which has massively outpaced that in any other major economy. As indicated in the table below, it’s increased by a compound annual growth rate (CAGR) of 56.5 percent, each year for the last five years.
Today, China’s e-commerce industry is the biggest in the world, with revenues of US$665 billion. That compares to the U.S., which is the second largest, at US$440 billion. Amazingly, in 2012 China’s ecommerce industry was just one-third the size of that of the U.S., which was then leading the world.
China’s explosive ecommerce growth will inevitably slow, as it increases from a larger base. But it’s going to be a template as companies in other markets expand their ecommerce operations… and as Chinese companies expand abroad with their cutting-edge technology.
Editor, Stansberry Churchouse Research
P.S. Central to the explosion in ecommerce is another key supporting technology: Robotics. Every major ecommerce company in China is adopting robotics into its supply chain to accommodate the tens of millions of orders the industry often needs to process in just as little as a few hours. We’ve done a lot of research into the best way to invest in this angle… you can learn more here.
Contrarian investing is one of the most popular investment strategies in the stock market (which of course is a contradiction). So it’s by definition misunderstood or misapplied by most everyone (we’ve talked about it here, here and here).
Buying when everyone else is selling, and venturing into hated markets, is scary. It takes a lot of courage to go against the herd.
Right now, the herd doesn’t like China.
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While the Dow Jones and S&P 500 Indices are scaling new heights, China’s stock market has been among the worst performers in the world in 2018.
The Shanghai Composite Index has declined by 18.6 percent in 2018 so far. That compares with the 1.6 percent gain in the Dow Jones Global Index, a 6.8 percent decline in Hong Kong’s Hang Seng Index and a 3.2 percent drop in the Euro Stoxx 50 Index.
Concerns about a protracted trade war with the U.S. (see here and here) have hurt investor sentiment towards China and its economy. Recent threats by U.S. President Donald Trump to impose tariffs on an additional US$200 billion worth of Chinese exports will further rattle investors.
Then there’s China’s real estate market. And what’s more, superstition among investors here in Asia has in the past meant that they’ve stayed clear of the stock market during the “Ghost Month” that falls in August. Finally, a recent string of big IPOs that have fallen flat hasn’t helped.
As a result, China has become today one of the most hated markets in the world.
The chart above shows the Shanghai Composite Index since 2002, along with the percentage of stocks that are in the index whose shares are trading above their 200-day moving average. That’s a key indicator used by traders for determining long-term price trends – that is, whether a share is generally headed up, or down.
As the percentage of stocks on an exchange trading above their 200-day moving average approaches 100 percent, it often means that that the market is nearing a top. As the percentage of stocks trading above their 200-day moving average approaches zero, it signals extreme bearishness – and suggests that a bottom is near.
Right now, only 7 percent of the stocks in the Shanghai Composite Index are trading above their 200-day moving averages. That’s the lowest level in 2.5 years, indicating that buying sentiment is extremely weak.
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Of course, weak sentiment doesn’t assure that prices will start rising tomorrow, or anytime soon. Weak sentiment can always get weaker.
But if fundamentals haven’t changed, that turnaround may happen sooner rather than later. And little has changed in China so far as its economy is concerned. It’s still growing by at least 6.5 percent per year, driven by strong domestic consumer demand, booming infrastructure spending and a resilient property market.
Steel prices, a traditional key indicator of economic activity, have climbed 22 percent in China since the start of the year. Air travel domestically is still growing by double digits. And while retail sales growth of 8.8 percent is slower than last year’s, it’s still faster than growth in retail sales of any other major economy in the world.
China’s government has also shown that it will do just about anything to meet its growth targets, which it views as critical in maintaining social stability and confidence in the economy.
That includes stepping up a debt-fueled investment expansion, as it has done in the past, to mitigate any slowdown in its export-driven manufacturing sector – which accounts for 40 percent of the country’s gross domestic product.
This will likely result in further deterioration of China’s long-term debt profile. The country’s total debt-to-GDP ratio stands at 300 percent – similar to developed nations such as Italy, South Korea, the U.K. and the U.S. That’s about double where it was 10 years ago.
But this needs to be taken in the context of a tripling in the size of China’s economy over the same period in local currency terms, from 27 trillion yuan in 2007 to 82.7 trillion yuan last year. As long as the economy hums along at a rate that nearly doubles its size in the next 10 years, and its real estate market holds steady, China will remain a big opportunity.
Legendary investor Jim Rogers (who we’ve interview ourselves and talked about here, here and here) has made hugely profitable contrarian calls in the past. In a recent interview with BusinessWorld this week, he continues to be bullish on industries with Chinese government support, including those dealing with environmental cleanup, healthcare and agriculture.
Like us, he understands that the long-term trend of growing Chinese travel remains intact and strong, and that the Belt and Road Initiative will continue to generate enormous opportunities for investing in related Chinese stocks.
The recent correction in Chinese shares, while painful today, will likely soon go down again in history as just that – another correction that paves the way for bigger share price gains going forward.
Editor, Stansberry Churchouse Research
Late last year, a reporter challenged China’s government to use its surveillance systems to find him in the chaotic streets of Guiyang City’s 5 million people.
Using the city’s 20,000 high-definition surveillance cameras hooked up to the police department’s artificial intelligence (AI) software with facial recognition systems, the police located and cornered the reporter – in just seven minutes.
Guiyang City is just the beginning. China’s communist government wants to use facial recognition to create a vast national surveillance system.
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There are now around 170 million CCTV (closed-circuit television) cameras across China – which is nearly three times the number of cameras in the U.S. China plans to add another 400 million AI-enabled cameras by 2020.
In Beijing alone, the city police department has said that every corner of the capital is covered by their surveillance system.
Traditional video camera surveillance uses low-quality and non-digital resolution. But AI surveillance systems use high-definition digital cameras to create an enormous stream of reliable data that is analysed and combined with other stored data.
That means you don’t need to have half a dozen policemen staring into a row of TV screens, hoping to spot a potential terrorist in a crowded building or street, or to track burglars to their hideaway.
With assistance from Beijing, for example, one company supplying AI-enabled surveillance systems in China says they can now match a person’s face with his or her car. And they can match people with their relatives and other people they’re often in touch with. They can even trace a person’s footsteps up to a week back in time.
Yes, it sounds Orwellian… and if you’re concerned about privacy, it sounds very scary indeed. It would be difficult to do this in countries where personal freedom is a political third rail.
But in China, where the needs of the state supersede the needs of the individual, gathering data on people is a fact of life.
Since last year, facial recognition and artificial intelligence has been used by Chinese authorities to call out public offenders, such as jaywalkers and deadbeat borrowers, on social media.
Police in Beijing have credited AI-enabled surveillance in helping solve more than 1,500 cases in 2015, a 22 percent increase from the previous year. And in the first eight months in 2016, police in Nanchang, the capital of Jiangxi Province and a city 5 million, arrested 1,600 criminal suspects, solved nearly 3,000 cases and captured images of 90,000 vehicles that violated traffic regulations – all through the help of AI-enabled surveillance. In other words, many, if not all, of these cases would have slipped through the cracks had it not been for AI surveillance.
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Facebook has come under fire for its application of data collected from its hundreds of millions (sometimes billions) of users. The Cambridge Analytica scandal, where data on 87 million Facebook users was reportedly mined by AI for political purposes, landed CEO Mark Zuckerberg in the hot seat with the U.S. Congress.
That turned off a lot of people from using Facebook, which showed up in the company’s disappointing second-quarter results that had the lowest increase in daily active users in seven years. It wiped US$100 billion off the company’s market cap in a single day.
But Chinese technology and social media giants, which everyone knows share user information with the government, haven’t gotten in trouble… and have been allowed to grow and evolve their use of AI.
Didi Chuxing, the ride-hailing company that defeated Uber in China, announced it will be sharing personal data with China’s National Development and Reform Commission. The company is now eyeing AI features to match a driver with the photo on your smartphone (and vice versa).
More AI-driven companies like them are on the way.
Recently, two relatively young and unknown Chinese companies developing facial recognition software raised US$1.6 billion from several of the world’s leading technology and investment companies.
One of the companies, SenseTime, makes facial recognition software used in monitoring CCTV footage and scanning a consumer’s facial features to validate digital payments. It raised US$1 billion from the venture fund of Softbank (Exchange: Tokyo; ticker: 9984), one of Japan’s largest investment holding companies.
The other company, Megvil, developed a facial recognition system called Face++ that’s already being used in China for a range of security applications, including granting access to buildings and identifying drivers of vehicles operating ride-sharing services. It raised US$600 million from two investors, including e-commerce giant Alibaba (Exchange: New York; ticker: BABA).
These startups use artificial intelligence to discern individuals from one another in captured images or video by accessing a vast library of stored data – data they collected with the support of the Chinese government.
SenseTime has contracts with the government of Chongqing, China’s seventh-largest city with 17 million people. With the government’s help, it has already collected information on 500 million unique identities in the country, and tested on them (i.e., searched for them in cameras) to perfect their system.
According to International Data Corporation (IDC), AI spending globally is expected to reach US$52.2 billion by 2021. That’s a compound annual growth rate of 46.2 percent per year since 2016.
And while the U.S. currently dominates global AI spending at around US$5 billion annually, China is catching up, with spending expected to hit US$4 billion this year. China’s spending is expected to surpass that of the U.S. in 2019.
This investment will be in surveillance – as well as other AI applications in the banking, healthcare, retail, transportation and other sectors.
In a recent study from CB Insights, of the US$15.2 billion invested in AI start-ups globally in 2017, 48 percent went to China, and only 38 percent to U.S.
While the U.S. still has more AI start-ups than China, it won’t be for long. IDC estimates China’s five-year spending growth for AI will reach 68.2 percent by 2021. That’s 60 percent faster than the global average.
In January, the government announced it will spend 13.8 billion yuan (US$2.1 billion) to build a giant AI industrial park in Beijing’s Mentougou district, which will serve over 400 startups focusing on developing AI technology.
IDC also expects that about half of all AI spending will go toward cognitive (self-learning) software, just like the AI-enabled surveillance systems that can find a person in a city of 5 million people.
In short, we’re only seeing the beginning of China’s massive push towards AI. It’s why huge investment dollars are already flowing into the industry.
Editor, Stansberry Churchouse Research
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In short, U.S. President Donald Trump has accused China of unfair trade practices. So on July 6, the U.S. began imposing 25 percent tariffs on as much as US$34 billion worth of Chinese exports. China’s answer was a similar 25 percent tariff on US$34 billion worth of U.S. exports.
Trump has also green-lighted another round of tariffs (10 percent) on as much as US$200 billion worth of Chinese imports to the U.S.
Now, I firmly believe there are no winners in a trade war. But there may be silver linings for others.
Investment guru Mark Mobius, one of the grandfathers of emerging markets, said recently that he thinks some of the big beneficiaries of this trade war will be countries like Bangladesh and Vietnam.
The emerging markets fund manager, who ran Franklin Templeton Investments’ emerging markets team from 1987 to 2016, recently told CNBC that he would buy “those countries who are going to be exporting to the U.S. instead of China – like Bangladesh, Turkey, Vietnam. They are all big producers of garments and shoes and consumer goods.”
You see, with the U.S. and China slapping tariffs on each other’s products, the prices of those products will go up. For example, garments from China that are exported to the U.S. will quickly become more expensive. So U.S. companies will look for other, cheaper sources of garment manufacturing… like in Bangladesh and Vietnam.
(I visited both Vietnam and Bangladesh last year. I shared my impression about the latter country – and its garment industry – right here.)
This emerging tech market is forecast to rocket up by potentially as much as 2,000% in the coming years.
That gives you a small window of opportunity to potentially profit from what some are calling:
Increasing their exports to the U.S. would just be the latest boon for Bangladesh and Vietnam…
Vietnam, Bangladesh, as well as India are already expected to be the three fastest-growing economies through 2050 – averaging real economic growth of around 5 percent a year, according to a recent report by professional services firm PricewaterhouseCoopers (PwC).
That might not sound like much… but consider, the U.S., France and U.K. are all expected to grow less than 2 percent a year during this period.
Thanks to this growth, India is expected to be the second-largest economy in the world by 2050 – eclipsing the U.S., and behind only China (which will inevitably see its growth decline from its current level). Vietnam is forecast to move from the 32nd-largest economy to the 20th-largest. And Bangladesh could move from the 31st-largest economy to the 23rd-largest.
Economic growth comes from two sources: Population growth and efficiency growth. (Broadly speaking, economic growth is a function of the number of workers in an economy, and their productivity.)
Shifting demographics in part drives economic growth. While population growth is falling in many major economies like China and Japan (reducing the labour pool and damaging productivity over the long term) it is forecast to rise in many other parts of the world. Countries in Southeast Asia in particular have good reason to be optimistic… and changing demographics in this region will likely boost economic growth over the next several decades, as we’ve written before.
For economies, productivity is often measured as the percent increase in GDP per hour worked. This can come from people working more efficiently, like through technological innovation. Higher productivity means a growing economy.
GDP in many of Southeast Asia’s countries will also grow thanks to their youthful and fast-growing working-age populations, as shown in the chart below. More young workers boost output.
In short, if Vietnam and Bangladesh aren’t on your investment radar yet – they should be.
And that’s even more so because both of these markets have corrected sharply in recent weeks. On the back of trade war worries, Vietnam’s stock index has fallen by more than 20 percent, while Bangladesh’s is down 16 percent since recent highs.
But if Bangladesh and Vietnam profit from this trade war, expect their markets to head higher.
Publisher, Stansberry Churchouse Research
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