A New Investment Thesis for China Last week, I gave a speech to the CFA Institute Asia Pacific Investment

Conferen ce in Hong Kong, on The Investment Thesis for China. One of the Institute s members , C.K. Lee, posted this excellent summary of my talk on SeekingAlpha.com. You c an access the original here. As I joked to the delegates, this was probably the first and last time they woul d see a PowerPoint slide devoted to Marx s dialectic at a conference for CFAs. I m about as far from being a Marxist as one could imagine, but Marx stole his thesi s-antithesis-synthesis framework from the German philosopher Hegel anyway. So I m actually offering a Hegelian take on China s economy, not a Marxist one, in an at tempt to get beyond the conventional bull/bear debate.

At the inaugural CFA Institute Asia Pacific Investment Conference earlier this w eek, Professor Patrick Chovanec of Tsinghua University School of Economics and M anagement analyzed the investment thesis for China by taking an unusual tact: he applied the thesis, antithesis, synthesis dialectic that is often associated with the work of Karl Marx. The professor s synthesis, or conclusion, was that an imminent correction to China s economy will create promising opportunities in dynamic new sectors, including agr iculture, logistics, retail, consumer brands, and health care. Chovanec is a prolific blogger and has analyzed many aspects of the Chinese econ omy, from concerns about housing market imbalances in 2009 to worries about infl ation in 2010. He counts himself among those predicting a hard landing, but readil y admitted to being conflicted about China s future, telling delegates: I don t reall y feel that comfortable wearing a bear suit. That s because Chovanec sees huge unta pped potential in the economy of China, a country he first visited in 1986 (he h as since traveled to each of the country s 31 provinces, as well as Taiwan). Chova nec s use of the thesis, antithesis, synthesis framework is borne of an attempt to reconcile these competing views. Chovanec began his presentation by describing the prevailing thesis for China: t hat the country is on the verge of a profoundly disruptive economic adjustment; in other words, that the old China story is over. This story had been based on the premise that China would experience growth for as far as the eye could see, and that the rising economic tide would lift all investors, as long as they had exp osure any exposure. Unfortunately, the dangers of this story became all too clea r during the global financial crisis, which showed that China s export-driven mode l had reached its limits; that its over-reliance on investment was generating ba d debt and inflation; and that any delay in the day of reckoning would only heig hten the risk of a hard landing. Chovanec also pointed out that even a soft landi ng for China would represent profound, disruptive change at a micro level. Of course hard landings, otherwise known as economic corrections, are sometimes ne cessary in order for economies to reverse imbalances and return to health. This observation points the way to Chovanec s antithesis: that the very inefficiencies t hat have provoked a crisis offer immediate opportunities for companies and inves tors who are smart and prepared. These opportunities include short positions, pri vate financing, purchasing fire sale assets, and participating in distressed wor kouts. Short positions are the most obvious way to profit and have paid off for many hedge funds, Chovanec said, but they are not easy to execute in the Chinese market. He noted that private financing remains attractive because of the ineff icient allocation of capital in China, and the fact that many companies that cou

ld earn a return have trouble obtaining capital. (Conversely, the private equity market in China has been flooded with capital, he said.) Chovanec then turned to his synthesis, walking delegates through the case for ea ch of the dynamic sectors he identified as offering promising opportunities. Of these, he said, none are garnering enough attention from entrepreneurs or govern ment policymakers. Since the retail sector is largely staffed by unskilled labor , he suggested that the potential exists for companies to add value to the buyin g experience. He also pointed out that China still has very few national retail brands. In addition, he argued that logistics services and containerization were p otentially lucrative because they hold the key to massive productivity gains in Ch ina. And Chovanec noted that health care suffers from a lack of capital even tho ugh China s aging population will create demand for services such as retirement ho mes and assisted living. [The other key sector I discussed, but was omitted fro m this summary, was agriculture]. This post originally appeared at An American Perspective from China and is poste d with permission.