Saturday 25 January 2014

SGX wants you to start small and end up rich. Me too.

Here's an article from one of SGX top honco on how you can start small and end up rich. It's as though he was ghost writing for me as I hold the same view too.

--- A Straits Times Article (25 Jan 2014) ---


INVESTING can take time and effort. Many people I meet in my role at SGX tell me that they are daunted by the market knowledge and attention to detail demanded by the investing process, and fear the risk of loss.
Many believe only retirees or the wealthy have the luxury of time needed to watch the market and time their investments accordingly. Inevitably and unfortunately, for many of these people, the easiest course of action remains inaction.
Investing doesn't have to be like this. While it is true that stock investing may have intimidated many retail investors in the past, barriers to entry have been lowered in many ways over the last few decades.
These days, it's possible to get started with as little as $100 per month in start-up capital and still access an impressive range of investment vehicles.
Start small, start early
So what can you do with just $100 per month? The case for investing can be explained by the process of accumulation and compounding: you can build a considerably higher investment portfolio because on top of your accumulated capital, your investment returns are reinvested and multiplied over time.
This is especially so if you start investing at a younger age. Over time, small but regular investments in the stock market can definitely add up to a much bigger nest egg.
To see how this principle works, let's take a look at the Straits Times Index (STI), the benchmark index for the Singapore stock market, which tracks the performance of the top 30 listed companies.
Most months of the year, a STI company distributes a dividend. If a dividend payment is reinvested, then that reinvestment will later receive a dividend, which can again be reinvested and so on, creating a compounding effect over time.
If you had invested $100 month in the STI for 240 months (or 20 years), your total original capital investment would have grown from $24,000 to $52,409 by the end of 2013, including capital appreciation and $15,188 in dividends received.
If you further re-invested the dividends into the portfolio along the way, your total portfolio would have been worth even more at $56,031 a total return of 133 per cent, or more than doubling your initial investment.
And to achieve over half a million dollars in investments, you would therefore need to start with $1,000 a month.
Practising safe investing
It's possible to reap the benefits of progressive investing without taking on too much risk.
A number of methods are available, including regular shares savings (RSS) plans, which are automated investment schemes that adopt the "dollar cost averaging" method.
These plans let you invest a fixed dollar amount every month instead of committing to buy a fixed number of shares.
If share prices go up, fewer shares will be purchased, and if share prices go down, more shares will be purchased. This means investors can build portfolios in a more cost-effective manner.
For example, more units in the STI would have been bought in the month of August 2013 when the STI ended at 3,028 than in the April when the STI ended at 3,368.
Currently, local banks POSB and OCBC offer their equivalents of RSS plans.
For as little as $100 per month, you can contribute to plans that allow you to invest directly in Exchange Traded Funds (ETFs) that mirror the market performance of the STI.
Alternatively, you can also use the plan to purchase shares in "blue chip" companies that have traditionally been out of reach due to high minimum capital required.
Good things come in small packages
One of the changes investors in Singapore will see this year is the reduction in the minimum board lot size from 1,000 to 100 shares.
For investors with lower disposable capital, this will make blue chip and high-yield investment stocks much more accessible.
It will also enable investors to build more diversified and balanced portfolios with the same amount of capital.
Personally, I hope it encourages young adults to consider investing in blue chip companies and ETFs earlier.
By combining the dollar cost averaging and dividend reinvestment methods, you can achieve meaningful growth and returns on your investments without requiring large sums of initial capital.
In short, starting small now can help you end big.
The writer is head of retail investors at Singapore Exchange.
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Playmates are hawt!

Playmates are hot. No, I am not talking about those girls from the Playboy magazines. Get your mind out of the gutter. I am referring to Playmates Toys (869 HK). 

869 HK is developer of toys. It does the creation, the marketing, the distribution etc, of toys. Think of it like a Mattel or a Hasbro. On a smaller scale and without the household names such as Barbie and Hotwheels. It however, partners with brand owners to help monetize their brands through toys - e.g. Family guy, Michael Jackson, etc.

Now why is it hot...
869 HK actually looks terrible on 1st inspection. It was loss making in 2008. Again in 2009. And again and again until 2012, when it finally turn profitable. 

And with that turn, it turned into a multi-bagger. A 5x return on your $ to be precise. That's hot.

The turnaround in 2012 came from the launch of the TMNT toys which they develop, market and distribute. TMNT is essentially Teenage Mutant Ninja Turtles. Heroes in a hard shell! 

I love TMNT as a kid. And after a revamp in 2012, TMNT is apparently popular with kids in this generation too. And from what I can find online, that still remains the case in 2013. Thanks to the successful relaunch of TMNT, the related toys saw huge demand. TMNT toys were the #1 selling action figure in 2012. And it appears that it is still the case in 2013 if you go by some top 10 lists of things kids want for Christmas.

The heroes in the hard shells cannot be under estimated and the same can be said of the profits that 869 HK is making off the cartoon franchise. It is quite clear that 2013 profits for the company will be significantly higher than 2012. And the company has already issued a positive profit alert to that extent.

Looking ahead...
Going forward, if 869 HK can distribute the products to more territories beyond the core US and Europe markets and to the extent it can create more line extensions and products around the TMNT franchise, it can potentially grow profits further. If pricing can be increased, all the better, though it is not clear if it is possible in a very competitive toy retailing market.

It's main market is the US in which it derives 60% of its total sales. And if you are a believer of the US recovery, this company will surely benefit from increased consumer spending.

Oh and did I mention that the TMNT movie will be out in Aug 2014 and directed by the same director of Transformer. And guess who's starring - Megan Fox! Who knows what that will do for the toy sales.

The company is in a net cash position and require very little incremental capital to grow. So potentially, we could see the company issue a dividend for the year ending 2013. 

Now hold your horses turtles...
Now, this is all very exciting. But a few questions remains:

1) What happens when TMNT starts to lose favour with the kids? As it is, the company is booming because of TMNT. Its other products are not all that great. So there is a single-product risk here.

2) Given the popularity of TMNT and the fact that the content belongs to the content company (Nickelodeon in this case), will we see them ask for higher royalties and which could potentially mean lower profits for 869 HK?

3) Structurally, do kids still like toys? Are toys getting substituted by iPads and the like? Interactive games is all the rage, from what I see. Can traditional toys, which 869 HK produce, still be in demand? Can 869 HK revamp itself to cater to the interactive market?

4) What is the right price to pay for this? The company has no meaningful historical valuations as reference since it has been loss-making for the longest time. Its peers like Hasbro and Mattel are trading at P/E ratios +/- 20x. But are those data points relevant? After all, they are much larger players with their own library of brands.

Conclusion...
Clearly, there are many things to be excited about and many more to worry about. I think it is generally hard to get this right. But it is still a very interesting company nonetheless.

Let me know what you think. Speak to me here.

P.S. This article was written 2 weeks ago. Recent developments and price action has proven how difficult it is to make $ on this stock. Difficulty = insane. But at some price, it will provide a sufficiently attractive margin of error, IMO.

Disclaimer: the analysis is overly simplified. Please do your own research before reaching a decision. Caveat emptor
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Tuesday 21 January 2014

The ONE formula that works in unit trust investing

On this page, you won't find 5 reasons why investing in unit trusts is a bad idea. Neither would you find 3 reasons why you should. What you have here is a framework to think about unit trusts and references to resources that will be helpful.

My experience tells me most people know what unit trusts are. But for those who need to pick up the basics, please scroll to the bottom and you can find relevant links there.

Let's get started...
If you are reading this, it is most likely that you are clueless about investing. But imagine this. Imagine you are a boss (think of your boss) and you will like to hire a minion to do the work for you. 

But then remember, you are ignorant about investing. How then do you distinguish between someone who talks a good talk and someone who can deliver? Quite simply, you just choose a person who has already delivered the goods!

So for those who choose to be consciously ignorant, then you have to write the rules of the game in your favour. And the parameters that favour you are as follow: 
i) Choose only fund managers with a long track record and 
ii) who has demonstrated that they have achieved higher returns than the stock market across time
iii) and after subtracting fees, you achieve returns better than the average stock market return (i.e. 6% p.a +/-)

Stick with the tried and tested...
There are 3 key parts here - i) track record, ii) performance across time, iii) fees.

We are concerned not with short term performance but performance across time, since short term performance could be temporary. Info on the track record can easily be found in the fund factsheet, on fundsupermart.com or on citywire.com

Just make sure that the fund manager was the same person who ran the fund for the past # of years in which the track record was generated. If you are not sure, just email the contact person. If you can't get the answer, then just avoid it. I don't have the figures but the universe of funds with the track record of 5 - 10 years of outperformance and achieved by the same fund manager who is still there is incredibly small. So, limited work you have to do there.

Separately, we are concerned about fees. The only way to minimize fees is to avoid over-trading (i.e. buying and selling the unit trusts) and with time, the drag from the one-off fees (sales/redemption charges) will diminish. There is still the on-going cost which you can't run away from. Think of it like the salary for that Harvard MBA minion you just hired. 

Keep it simple...
Frankly, that's all you need. You may be told that you should diversify into different asset classes, different geographies, styles, etc. But if you are consciously ignorant, then what makes you think you can make a conscious well-thought through decision on which investing style is better or which geography is better? And if you can't, then the best you can do is find someone who has proven to be good, put your $ with him, and ignore the investing trends/flavours of the day.

There is a cost to ignorance and it is quite evident here in the world of investing. If you don't want to pay for the Ferrari that your Harvard MBA minion is driving, then you have to learn how to do it yourself. Only with knowledge, can you protect yourself and minimize costs. But without knowledge, the best anyone can do is outsource. And the formula is simple - find someone good and stick with him/her.  

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Here's a comprehensive read on unit trusts - download here

Let me broadly summarize the essentials of the above document. 

- Most SG unit trusts are open-ended funds and they tend to trade at their net asset value. Net asset value (NAV) is essential the value of all assets in the fund, less all liabilities. 
- There are one-off costs and ongoing costs. 
- One off costs include sales charge (upon purchase) and redemption charge (upon sale) and are usually 1.5 - 5%. Typically, a consumer is only charged either a sale or redemption charge but not both. This cost is typically priced into the product already, so you won't really 'see' it but it is there (see pg 12 -14 of the document)
- Ongoing costs include mangement fee (typically 0.5 - 2% of NAV) and trustee fee (0.1 - 0.15% of NAV)
- Capital protected funds do not guarantee that you receive 100% of your capital back; only capital guaranteed funds do

Here's a glossary of terms that you might need - go here

Thursday 16 January 2014

Fare increase come already!

Fare increase come already! Within expectations but on the higher end of expectation range. Bad for commuters like me and great for shareholders. Note that next yr also got fare increase, it will seem. Seow liaoz!

[disclaimer: this is a first cut impression; maybe I will come to a different conclusion after I read the detailed annoucement]
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--- A Straits Times Article (17 Jan 2014) --

The Public Transport Council (PTC) has approved a fare increase of 3.2 per cent on train and bus fares from April 6 this year.

Adult card fares for buses and trains will go up by 4 to 6 cents per journey. Senior citizens will pay 2 to 3 cents more per journey, while students pay 2 cents more.

Cash fares for train and adult bus rides will go up by 20 cents per trip, while senior citizen and student concessionary cash fares for bus rides will increase by 10 cents per trip.

Public transport fares were last adjusted in October 2011. The 2012 exercise was suspended to allow a Fare Review Mechanism Committee to come up with a new fare formula, which includes an energy component to reflect rising costs as well as more fare subsidies.

This latest round of exercise combines the 2013 exercise with that for 2012.

At a press conference on Thursday, PTC chairman Gerard Ee said the adjustment takes into account the 2012 fare cap of 4.5 per cent, and the 2013 fare cap of 2.1 per cent.

“Clearly, 6.6 per cent in one go is very high, and so, to minimise the impact on commuters, it was obvious to us that we should just do part of the increase this year, and roll-over the rest,” said Mr Ee. 

Hence, the balance of 3.4 per cent will be rolled over to the 2014 exercise.

He stressed that affordability was a key priority for the council, and the 3.2 per cent increase is “significantly lower than the expected average national wage increase for 2013”.

The national wage increase is likely to be close to 5 per cent, he said.

But he also said the council’s mandate was to “strike a balance between affordability of public transport fares and the sustainability of the public transport operators”.

Wednesday 15 January 2014

Why dividends may be bad for health

We all like the prospects of receiving $, which is why stocks that offer a dividend has such an allure to it. But it doesn't always make sense to buy a stock just for the dividend. You will see that later. For now, let me go back to basics 101.

 
Where do dividends come from
Dividends can be paid out from 1) earnings stream and/or 2) assets.

 
To pay more dividends per share, the company can
i) Increase profit,
ii) raise payout ratio (i.e. % of earnings that gets paid out),
iii) pay out of cash on hand,
iv) borrow to pay out to shareholders,
v) reduce share base by repurchasing shares

 
Note that per share is what investors should be interested in. Speak to me here if you don't know why.

 
The dividend yield is simplistically the dividend per share divided by the share price. It essentially shows how much you are paying for that stream of dividend.

 
Why getting a lot of dividends is good
A bird in hand is better than two in the bush. Getting a dividend helps lock in some potential returns. On average, it has been proven that dividends is a significant contributor to total returns for investors.

 
It provides a return while investors wait for good thing to happen. It allows for patience, which is an investor's greatest asset.

 
Why getting a lot of dividends is not always a good deal
Lower growth. There is a trade off between growth and dividends. The more the company pays out, the less it retains to grow the coy. That means potentially lower growth. And we want growth because higher earnings often means higher dividends too! By getting more now, you may actually end up getting less in total over the long term.

 
The dividend may not be sustainable. If the company is paying out too much of its earnings or borrowing to pay out dividends, there is a risk that the company is under-investing in its business or spending beyond their means (like how it is bad to borrow from loansharks to spend). In such instance, the dividends may not be sustainable.

 
The same can be said for companies whose future profitability is in question - e.g. manufacturers of tape recorders - and consequently whose dividends cannot be maintained at current levels.

 
It is important to monitor the cashflows to make sure there is enough cash coming in to pay cash to you.

 
How much should you pay for dividends
No rules..There's no hard and fast rule here. It depends on the specific industry the company is in and the specific company itself. Broadly speaking, you can price it on an absolute basis, or on a relative basis against peers or against historical valuations. If you don't understand this terms, speak to me here.

 
Except the rule of total returns...The only rule is that you should not overpay for dividends alone. You must factor in the prospects for growth or lack of. You need to measure the prospects of capital gain or loss against the dividend yield you are receiving. Look from the perspective of total return. [total return = dividend + capital gains]

 
The ideal company
Put simplistically, the ideal company is one which
i) pays a decent dividend yield,
ii) do so at a manageable payout ratio to balance paying a dividend and growth,
iii) has demonstrated this by increasing dividends across time
iv) can sustain the dividends going forward
v) and provide prospects for capital gains as well

 
Where can you find a dividend winner
i) Read this blog (subscribe to it via the box on the top right hand side),
ii) Join my course,
iii) Read the papers/magazines (Straits Times/Business Times/Edge)

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Tuesday 14 January 2014

Why you should not save for your kids

You should not save for your kids. You will be doing them a disservice. A huge one in fact. 

See, the biggest asset that your kid has is youth. Or simply put, TIME. Why are you not using that to your kid's advantage?

What can we do with time?
We all understand that with time, the magic of compounding will grow $1 into much much more. For instance, if you could put a $1,000 in the bank account at a deposit rate of 7% p.a., your $ will double in 10 years time. And double again in anther 10 years. Simply put, it will grow by 4x when your kid is 20 years old.

In short, the faster we can compound the $ we set aside for our kid - your kid - the more he or she will have at age 20.

Now, we will all love to get a 7% bank deposit rate. But no bank is offering that. 1% is what they are giving you. "Take it or leave it", is what they will tell you.

Imagine...the potential of time
But imagine that you can achieve that in the stock market. And you really don't have to imagine it. Because that is a fact which is backed by endless academic papers. 

Fact: The stock market offers the highest returns amongst all asset class, across time. 

And time is what your kid has. In abundance. Out of the springtime of youth, your kid will have an abundance of wealth. Your kid will have a headstart over its peers, in the race towards financial freedom. If you invest.

And shouldn't you give your kid a headstart in life? 

Give your kid a headstart - $ and education
You may give your kid a headstart by giving your kid all the $$$ in 20 years time. 

Or you could simply apply it to your kid's education. University fees are expensive now and they will probably be more expensive 20 years down the road. By investing now, you can afford to pay for that pricey college education later. 

Else, your kid may end up having to take on a loan to pay for school. And to be in debt even before earning a single cent. That sucks. 

So do yourself a favour. Do your kid a favour.

Invest today for your tomorrow; for your kid's tomorrow. Learn how to do it in our free preview class here.

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Potential fare increase may be announced on Thursday

Will we see a fare increase? Will ComfortDelgro & SMRT move up because of this? Akan Datang


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A Straits Times Article (14 Jan 2013)

BT 20140114 NRPTC14 913941
Going up? In December, transport operators SBS Transit and SMRT applied to the Public Transport Council to raise bus and rail fares this year. - FILE PHOTO
[SINGAPORE] The Public Transport Council (PTC) will release its decision on fare adjustments for public transport this Thursday, said Minister for Transport Lui Tuck Yew in a Facebook post yesterday.
"I told (PTC chairman Gerard Ee) that the government was ready with our package for the low-income workers and persons with disabilities and that we would like to announce this together on Thursday. These two concession schemes will be fully funded by the government," wrote Mr Lui, stressing that the schemes would make transport fares much more affordable for both groups.
In December, transport operators SBS Transit (SBST) and SMRT applied to the PTC to raise bus and rail fares this year, with SBST - Singapore's biggest bus operator - citing cost pressures.
In his Facebook post, Mr Lui also said that the discount under the scheme for low-income workers would lower their fares to around the same levels as 10-15 years ago, depending on the journey. Meanwhile, the discount for those with disabilities will be "even more significant".
Mr Lui also highlighted that public transport vouchers would be made available throughout the year to help other groups who may also require assistance.
In November last year, the PTC said that it would continue to work towards striking a balance between keeping fares affordable and ensuring that the public transport system remains financially sustainable.

Monday 13 January 2014

Investing in China with Jay

This is a follow-up on the post about Soros on China.

To put it out there, I am not smarter than Soros. There, I said the obvious.

But I believe that an average investor do not need to be as smart as Soros to make good money. He or she just need to make reasonable assumptions and proceed on that basis. Here, are my reasonable assumptions for the HK/Chinese stock market.

--- My thoughts ---
My thoughts are that it is impossible to predict the outcome with reasonable certainty as there are way too many moving parts and too many factors to consider. 

However, I believe that an investor can proceed on certain reasonable assumptions, without trying to pass judgement on the outcome. 

One, it is reasonable to assume that any restructuring will not be achieved in a straight line fashion, but rather in a stop-start fashion, where the Chinese have to decelerate growth to rein in bad credit and excessive capacity, while raising wages and boosting domestic consumption. And when growth undershoots and lead to the risk of a viscious downward cycle, it will have to tap on the accelerator, expand credit and boost growth. In essence, the only viable strategy is to grow both the export and domestic markets in parallel but in a fashion where the domestic market growth must outstrip the export market growth. 

This however is tricky as 1) it assumes that the Chinese authorities are god-like and could manage that process with precision, 2) the external demand must be sufficiently strong to allow the Chinese export market to continue growing, 3) consumers must continue to feel optimistic about the future despite an environment of slower economic growth.

Implication #1. A stop-start growth pattern will most likely lead to similar volatility in the Chinese/HK stock market due to constant adjustment in the assessments & expectations of short-term & long-term economic and profit growth rates. This, in my view, will be profitable for those who are able to call the fickle shifts in expectations. But that is a risky business for most investors.

Two, China will most likely see lower growth rates in the immediate years and possibly after. The odds are stacked this way because 1) a maturing economy will natrually see lower growth rates, 2) its impossible to constantly grow at >8% p.a. And during the restructuring period, growth will most likely fall because the larger part of the economy (export/investment) will need to grow at a slower rate than the smaller part (consumption). Unless consumption demonstrate off the chart growth - and it is entirely possible though the odds are not in its favor - growth will natrually be lower. 

Implication #2. The implications for investors is that valuations for stocks should come off in general as expectations of long term profit growth should be lowered. It means that even with profit growth, stock prices may come down due to valuation compression. Historical valuation range may be a poor yardstick for the investor in trying to predict forward valuations. 

Three, the continued growth of China will not be shared by all. On average, the export businesses will see lower growth unless they successfully shift their production for domestic consumption, in the same way that the Chinese economy is restructuring. There will be consolidation & thus survival of the fittest. 

Implication #3. The marginal player in the commoditized export business will die. The remaining will share the profit pie but it is unclear whether their slice of the profit pie will be larger than what they had previously. The performance will be relative rather than absolute. At some prices, such businesses may be attractive, but in most instances, one may find himself being too smart for his own good in trying to pick winners here because the winner may not even see profit growth. 

Four, wages will have to increase for restructuring to succeed. Those who are unable to increase prices faster than wages or manage other non-wage costs to grow slower than wages will either see i) lower profit margins, ii) negative growth [it is possible to see higher growth even with lower profit margins, if revenue growth is sufficiently high] 

Implication #4. Expect potentially slower revenue growth due to potentially slower economic growth in China, and expect potentially even slower profit growth due to rising costs. Three types of companies will buck the trend - i) those with strong brands [pricing power], ii) those with market power in a non-fragmented market [pricing power], iii) those with superb cost management skills [cost control]

Conclusion.
 It appears that there are many reasons to be short on the Chinese market, since even a successful restructuring seem to offer the possibility of stock price compression.  Further, unlike the previous era where the rising tide of wealth creation lifts all boat, this change in tide will see winners & losers emerging. So the odds of picking a winning idea is now further reduced. The only prudent way to navigate through this treacherous ocean is to be a stock picker. One can also try to call the fickle shifts in waves as the tides move but that may be a lot harder. 

Sunday 12 January 2014

What Soros think of China

It always pay to listen to what other smart people says. It pays even more to question them sometimes. [My thoughts in a later article] Here, we have Soros talking on China. Though the interview was done in April 2013, much of what he says are still valid concerns and considerations.

I have summarized what I think are the key points below. In essence, the Chinese economy is restructuring and it is unclear whether it could do so successfully without blowing up. The jury is still out on that.

---- Summary of Article ---

Change in economic model
In the article below, Soros makes a point that the old export model of China is reaching the end of its useful life and the economy needs to restructure. And that 2/3 of the economy (export) needs to slow while 1/3 of the economy (domestic consumption) needs to grow. By simple mathematics, that will lead to lower growth in China and as such is a difficult transformation. It is also difficult because if the economy slows sufficiently, the consumer may also be cautious and cut back on spending, leading to a vicious cycle that equates to a hard landing for the Chinese economy.

Maintaining economic growth vs Bad debt
To maintain higher growth, the Chinese has launched stimulus that led to increase in production capacities which was not met by sufficient expansion in the markets they serve, in part due to the poor external environment. Consequently, the rate of return on investment is poor and may be insufficient to service the loans taken out to fund them. In short, a problem of potential bad debts.

To rein in the issue of bad debts, the authorities has to reduce the credit available out there. But that clearly led to an economic slowdown in 2012/13, which was potentially destabilizing. And which is what led to the authorities opening up the credit spigot to jumpstart economic growth.

In a more recent article, he further elaborate on this issue of bad debt. In essence, he points out that there remains a contradiction - restarting the growth without a corresponding growth in demand will lead to exponentially more bad debts, which will at some point, blow up. [As implied by Soros]

Failure to restructure without blowing up will undermine social & political stability within China. Potentially, that might mean repression within China and even military confrontation abroad.

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http://www.scmp.com/news/china/article/1208805/interview-george-soros
http://www.project-syndicate.org/commentary/george-soros-maps-the-terrain-of-a-global-economy-that-is-increasingly-shaped-by-china
Chinese Economy and the new Leadership

Q: What do you think of China’s economic performance in the past year? 
A: Since 2008, when the financial crisis started in the US, China became the motor of the global economy. It became the driving force moving global economy forward. China’s economy is much smaller still than the US. It is smaller than the US consumer [economy]. Therefore, the growth has been slower since 2008 than it was before. So I rate China’s contribution quite high. 
Q: What are the main threats to the Chinese economy?
A: They are partly external, because of the slow growth, and the inability of the global economy to continue to absorb the ever-increasing Chinese exports. And internal, because China has to change its growth model. China has to reorient itself from export and investments to domestic consumption.
It is going to be a very difficult transformation, because the household consumption is only 1/3 of the Chinese economy. Exports and investments are 2/3. The growth of 1/3 cannot make up for the slower growth in the 2/3. Therefore, the overall growth rate will have to be significantly slower than it has been up to now. That is a very important point.
I don’t have enough knowledge to have an estimate [of China’s GDP growth rate this year], but the official estimate is 7.5 per cent. The important point is that it is less than the 8 per cent which was considered sacrosanct until now. It was in fact significantly exceeded in reality. That means significantly lower growth.
Q: What will China’s economic transformation be like in a few years?
A: I think the period of rapid growth when the overall economy was growing more than 10 per cent in reality is over, and it is unlikely to recur. It is a phase of growth that occurs at the early stage of economic transformation, and it does not occur in the more mature phase that China is today entering.
Q: What do you expect from the new government after the new leadership took power?
A: I believe they are aware of the need to make this change. I should have said earlier that this change doesn’t necessarily have to occur today -- the old model can last for another year or so, but it cannot last another 10 years. Therefore, the new leadership that has to think in terms of 10 years must embark on this change, especially that, in my opinion, the change was already delayed by the previous leadership which only had one or two years to go, and therefore they extended the life of the old model. That actually creates additional problems for the new leadership because with the extension, some serious imbalances have developed in the last year or so.

Shadow Banking
Q: What are the imbalances?
A: By stimulating investments, the capacity of industry increased, but the market didn’t increase enough. Therefore, the profitability of production, both of export and of investment themselves, declined. That creates financial problems -- it increases the bad loans that banks have made. And also, the government has started cutting back on the availability of cheap credit. Therefore, particularly the real estate companies were forced to borrow in the quasi-bank markets. And that borrowing cost is much higher, at a time when the investments were less profitable. When it comes to repaying the loans, there may be some difficulties in collecting the money.
The quasi bank market is mainly in the hands of state-owned banks, which have wealth management subsidiaries. And there is an implicit guarantee by the banks, so when the wealth management companies have difficulties in collecting the loans, the state-owned banks will have to make up for the difference.
On a few occasions when this has occurred so far, the state-owned banks have always made up for the losses. But if they are very big, maybe one of the non-state-owned banks cannot meet its obligation, and then you could have a run on that bank.
So this is somewhat similar to what happened in the United States with the subprime mortgages that eventually, of course, led to a serious financial crisis.
Now, I think the authorities are aware of the problem, and they also have very substantial resources available to deal with the problem. They also know what happened in America in 2008. So I think they will be able to deflate this incipient bubble without a serious financial crisis. This is the problem the new leadership now faces.

China’s Financial Regulation
Q: What is your assessment of how China’s policies worked in 2008-2009? Were they successful?
A: China was very successful in 2008 when there was a very large, sudden drop in export of more than 25 per cent, to stimulate the economy. And they had the resources to do it. So China sailed through the crisis of 2008.
Q: Do you think China’s financial regulatory system operates effectively?
A: I hold China’s financial regulatory system in very high regard. And I have actually met them in the past, so actually know them. I think they understand the problems, and they have learned lessons from the mistakes that were made in the West.
I think the Chinese regulators have a much closer and more intimate knowledge of what goes on inside the banks. The lack of detailed knowledge in the West is quite amazing. And that was the reason why things went so wrong.

Chinese Stock and Real Estate Markets
Q: What are your views on the Chinese stock market?
A: It is not surprising that the market did not go up in line with the overall growth of the economy, because that growth was actually accompanied by a lack of profits. And stock markets generally reflect the growth of earnings, not the growth of output. Because too much went into investment and export, they were not profitable. In fact they even created problems for the banks. Naturally they also created problems for the stock market because there is a lack of earnings.
In five to 10 years, if the authorities are successful in changing the growth model, and there is more production for consumption, not for export and investment, then the profits of the companies that cater to the consumer could increase, particularly those winners who can innovate and fulfill the needs and the taste of the consumers, could become very good investments.
And of course that would mean a larger portion of the economy would be in the hands of private enterprises rather than state-owned enterprises, and the private enterprises would be more independent from the state, and would not have to pay rent to the bureaucracy. That would be a big improvement in economic performance.
Q: What about China’s real estate market? Do you see bubbles?
A: I think real estate is rather vulnerable in China, because it has been a favourite form of savings. People bought more than one apartment, particularly state employees who have financing which enables them to buy more than one apartment. So there has been a large accumulation of apartments which are empty and are like savings in gold or in a bank.
I think it’s part of the transformation that at least the empty apartments will have to be sold, or maybe taxed. I think they are now a risky investment.
I think imposing a property tax would be very effective, but it would have to be done very gradually, exactly because they are so effective, they could create a crash.  If, say, a state employee who has five apartments, of which four are empty, he would have to pay tax for five apartments. He couldn’t hold them, he would have to sell them. Then the market would be flooded by apartments for sale. That is something that has to be done very gently. So far I don’t think it has been done except in some pilot schemes, but I don’t know the details.
If you have to pay just five per cent or three per cent tax every year whether you sell it or not, that would have the effect of pushing some people to sell.

Urbanisation and Planning
Q: What do you think about the Chinese leadership’s urbanisation policies? Is it realistic to expect urbanisation to continue to drive the Chinese economy in the years to come?
A: I think it is very realistic. Urbanisation is likely to occur whether authorities plan it or not. And the fact that they are planning it makes it easier for them to prepare properly. If you don’t prepare for it, you would have, for instance, no services for the people rushing or being drawn to the cities, and you’d have slums. They occur all over the world -- you have very fast-growing, large cities all over the world. I think it is definitely going to happen. And I think in this respect, China is in the forefront of planning for it.
Q: What do you think of the Chinese government’s economic planning capabilities?
A: It may be too rigid. I visited the new cities planned for Tianjin, and there is a plan showing individual houses, and what they would be used for in 20 years time. I don’t think anybody has enough foresight to be able to predict what the demand would be in 20 years’ time. It would be very interesting to see how close the actual development would be to the plan.
Pudong had this plan, which was very impressive, and the reality came very close to what was planned. But I have my doubts whether the next one would be equally successful. It is too rigid in my opinion.
Obviously there is a middle ground, and particularly the United States has relied too heavily on private enterprise, and now is paying a heavy price. China has been at the forefront of economic planning, and very successful at it. But maybe Chinese planners are becoming overconfident in their ability to design the future. There is a danger that they may overdo it.
I think the initial signs are very encouraging, but it is too early to form an opinion. On the balance, I am optimistic because there is already a tradition in China of recognising the need to change the business model, switching from one to another. The existing model has produced positive results. The government has quite substantially accumulated reserves, such as the foreign reserve. That gives them the need to correct shortcomings.

Long or Short on China?
Q: If you were an active investor now, would you describe yourself as long or short on China?
A: I am also aware of the exceptional difficulties that the transition is going to bring, and therefore, if I were an investor, I think I would be very cautious in the near term – the next year or so. Because you have this situation when 2/3 of the economy has to slow down, and 1/3 has to expand. That already makes it very difficult. What makes it even more difficult is when there is an overall slowdown, the households’ first reaction may be to become more cautious, and their propensity to save would increase – they would be afraid that their job is not safe, and they would not be so confident in spending money. And then all three of the sectors would slow down at the same time. That would create a hard landing.
Q: On many occasions people have spoken about a hard landing in China, but there never has been one.
A: I think to some extent, the hard landing has already occurred, but it hasn’t been so hard. Automobile sales slowed down, and housing market slowed down, in the last year. Then the authorities gave another shot of stimulus which was very much like the old style, relaxing monetary conditions, and then housing recovered.
I am sorry to say, but the jury is out.

On Local Government Debts
Q:  What about local government debts? How big a threat are they?
A: The business model of local authorities depended on selling property at ever rising prices. That is not sustainable. And you will need to actually make houses available at affordable prices, so you need social housing. That doesn’t give local authorities the revenues they are used to. Actually, it may involve expenses. And so, the local authorities would be under considerable pressure.
I don’t think there is any risk of large-scale defaults, because there will be re-allocational burdens from the local government to the central government. Maybe it would increase the control of the central government over local governments, but I can’t imagine the central government allowing local governments to default, just as it is most unlikely that the state-owned banks would allow one of their wealth management companies to default. The consequences would be too severe.

The RMB
Q: What do you think about the internationalistion of the RMB? Will it become a world currency in the future?
A: At sometime in the future, yes. But the government is eager to see the RMB being used in international transactions, but not to allow the international market to be too closely connected to the domestic market. And I actually approve of that policy because it has protected China from external shocks creating too much trouble internally. And I think it is quite a wise policy. But the domestic market will have to become much more mature and the international markets will also need to be better controlled, become more stable, before the RMB would become a global currency.

Gold
Q: What is your view on gold?
A: That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else.
Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.

China and the European Financial Crisis
Q: What role do you imagine for China in the European financial crisis?
A: China has just made a gesture of contributing 1 billion euros to the rescue of Cyprus. This is a symbolic gesture because China has an interest in maintaining the euro as an alternative to the dollar. And it has large holdings of the euro that it doesn’t want to see lose value. It is a defensive contribution.

Philanthropy
Q: What advice would you offer in terms of philanthropy to the increasing number of rich people in China?
A:  People who have become rich in China show real interest in philanthropy, which I think is very praiseworthy because I think it is appropriate for those who have benefited disproportionately that they should return some of it to those who are less fortunate. I think it will contribute to social harmony.


I think the natural instinct is to engage in charity. But that has some negative side effects, because charity can turn the recipients into objects of charity, who become dependent instead of depending on themselves. There are people, like the sick and the old, who need to be taken care of. But particularly in the case of children and young people, it is much more important to enable them to improve themselves, giving them opportunities to learn. Scholarships are better than charity.