China ‘may not want to’ save Italy – Matthews Asia

Robert Horrocks, CIO at US-based fund provider Matthews Asia, has said that China may not feel obliged to step into any rescue efforts targeting Italy.

Instead, he points to the key role of the ECB in setting out any rescue agenda, adding that China feels it is “doing what it can” to stimulate global demand in favour of an improved economic environment.

China’s own long term development takes priority, he suggested, particularly on issues such as the RMB and its emergence as a global key currency.

Freely floating the RMB in the immediate near term would not necessarily benefit the currency or the country, as while Chinese investors would likely pile into assets such as US West Coast property or the US equity market, where there is already a significant level of interest, there is no evidence US or European investors would invest to the same extent into China.

Additionally, issues such as corporate governance, and accounting and auditing standards require continued development to enable China to achieve its goal of making Shanghai into a global financial centre by 2020.

Horrocks noted that in the early 20th Century – 1913 – there was virtually no international trade denominated in US dollars. By 1924 it had overtaken sterling, but it required the establishment of the Federal Reserve as a supporting factor to make this happen. Similarly, it may take time for the RMB to fulfil the ambitions of the Chinese monetary and other authorities.


Matthews Asia argues that the key trend for investors to follow in China and other Asian economies is the development of consumption. Once a per capital threshold of about $3,500 is hit, it triggers a sharp rise in consumption. This has happened and is happening across the Asian continent as countries seek to emulate developments previously seen in the likes of Japan and Korea. Currently, compared to Japanese GDP, countries such as Malaysia, Thailand, China, Sri Lanka, Philippines, Indonesia, India and Vietnam hover at levels seen in Japan in the 1970s, according to Matthews Asia data.

Fostering the rise is wealth is an improvement in wages. This is happening alongside improvements in productivity. This means that wages can rise without leading to equivalent increases in unit labour costs, further spurring consumption. Meanwhile, the structure of economies is changing, and therefore investors need to consider different opportunities in services, such as shopping centres, rather than traditional fixed asset investments.

Horrocks said that the issue of rising wages is “crucial to the way we think about investing in Asia.”

This also leads to the idea that consumer trends rather than top-line GDP growth figures should be more interesting for long term investors, that is, investors should be less concerned about whether, say, China’s GDP growth rate slips 50bps over a year, but instead start to look for the businesses that will do well from the economic changes under way.

One explanation of the sorts of opportunities developing along with the rise in consumption is in the awareness of brands. This is visible in supermarkets in Asia: where once goods would have simply been piled high, there is now space on shelves between manufactured foodstuffs from different brands. Horrocks said this illustrates the growing importance of brands to local consumers.

This also points to reasons why Asia’s already developed economies such as Japan and Korea will also benefit as others in the region develop.

“Japan needs Chinese Growth and China needs Japanese quality,” Horrocks said about the concerns around recent geopolitical events involving the two countries. Chinese consumers are concerned about quality, and Japanese companies have a good reputation for delivering this, he said.

It is not only a story about China, he stressed. In terms of demographics, the countries of South East Asia have an advantage in terms of younger populations compared to both developed Asia (such as Japan) but also other emerging Asia (such as China). This is because population projections from the UN suggest that an increasing proportion of the most economically important segment of the population – those ageing from their 20s-30s into their 40s-50s – will come from Asian countries other than China.

China recognises the opportunities elsewhere in Asia too, and Horrocks expects more Chinese investments to be made regionally to fill any economic voids left by the US and Europe – which may be more focused on, say, military ties.

No overinvestment

There are arguments that levels of investment in certain Asian markets may be over-egged. Horrocks disagrees, particularly over China. Data leading up to the financial crisis in 2008-9 does not suggest the Chinese government was seeking to overstimulate the economy, although it subsequently pumped significant sums into the economy.

A growing proportion of the Chinese economy is being accounted for by the private sector, with implications for more efficient allocation of capital. Meanwhile, although infrastructure developments are big, Horrocks argues that China is estimated to see the equivalent of the population of the US move from rural to urban areas over the coming decade, and that about half the current housing stock will need to be replenished over that period – with many aspiring middle class Chinese refusing to consider living in 1980s era apartment buildings.


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