Matthews Asia Snapshot


China's Idiosyncrasies and Investing Insights

Week of November 12, 2018

Spotlight on Andrew Mattock, Matthews Asia Portfolio Manager

When Matthews Asia Portfolio Manager Andrew Mattock is in China kicking the tires for investment research, he makes a point of spending time in the country's inland regions and smaller so-called tier 3 and tier 4 cities. He notes the products on the shelves in pharmacies, supermarkets and department stores, observing which brands might be discounted and which are stocked at eye level. He talks to everyone from “used car salesmen and new car salesmen to local property developers, local city commercial bankers and local life insurance agents” to take the pulse of business.

Particularly in China's more remote regions, it's not just his Western features and 6'5” frame that attracts curiosity, but often his deep knowledge of the country. Even his translators frequently ask, “How do you know so much about China?” His quick reply is: “I've been coming here for 20 years! The way I think is more Chinese now.”
 
Andrew—an Aussie who studied the history of economic ideas and accounting in school—is a history buff and an avid skier with a reputation for being tenacious. This tenacity led him to “badger” his previous firm for three years until they agreed to let him launch a China fund. He has been combing China for Matthews Asia since 2015 as the lead manager of our China Strategy. In this Q&A, we spoke with Andrew about his insights on investing in China. 

Does a historical perspective factor into your decision-making about investments?

A solid grasp of the country's idiosyncrasies gives us useful insights into things like China's political motivations, cultural nuances and social tendencies, which are critical for understanding its business environment. It's not all about a stock and its management team. If it were that simple, then you'd just have a checklist, tick off your metrics and say that's the stock we should buy. But there's a lot more that goes on around a company. You have to understand the way China works; the way industries are put together; the way government sets policy; the history of why they might do things a certain way. 


Men at Work: Portfolio Manager Andrew Mattock, second from right, with colleagues and a residential property developer on a research trip in Henan Province, China.

Is it more challenging to run a China portfolio compared to one for markets elsewhere in Asia?

Yes, I think so. For starters, China sparks a lot of emotion for people—maybe because it's big, maybe because the U.S. is worried about it, maybe because it's Communist. It can be a hard market to navigate because to a certain degree, it tends to draw a lot of irrationality—that's also the opportunity—but you have to be mindful of the irrationality and not overact to it. On a business level, it can be harder to pick companies because the Chinese market is so competitive and changes so quickly.
 
It can be daunting. Cities are in all different stages of development, so to generalize about China is also very difficult. What's going on in smaller cities is different than what's happening in Shanghai or Beijing. But because I've been going to China for 20 years, I saw what Shanghai and these cities up and down the east coast looked like decades ago. I can relate to how these inland cities are changing and what can be possible for them in the future. 

What worries you about China now, and how do you manage the risks? 

All the talk about “Is China going to collapse?” and all that…It feels like I've been fielding this question every year now for almost two decades. Sure, China is moderating off a high base from last year so earnings growth won't be as strong as it was in 2017, but it's still pretty solid across the board. And it's still three times the growth rate of the U.S. That's not bad.

The long-term outlook for earnings is still looking solid and a lot less cyclical because the earnings story is being driven now by completely different stocks and sectors. It's all consumer-driven, whereas in previous cycles it was driven by building. It was driven by construction and property. Last year it was being propelled by things like casinos and high-end autos and appliances, travel, insurance, technology and health care. There are over 1 billion 4G subscribers and China is aiming to launch the 5G network as quickly as possible. On a monthly basis, Chinese average data usage is more than 3 gigabytes of data per month per person, growing at 100% year on year. China may have found its economic footing.

We're also careful about how much we pay for growth. And many of our holdings are domestically oriented so they tend to be less vulnerable to trade rhetoric. Most risk comes at the company level in China. This is due to the competitive intensity and the ease with which you can do business there so that's why understanding this competition from the bottom up is often underestimated in managing risk. 

How was your recent month in China? How was the air?

I was surprised that the air already seemed to be a lot better. I used to have to travel for hundreds of miles from place to place in China by car. Now, fortunately, I can take the high-speed rail, which is extensive in China. It's quiet, efficient and fast. It's comfortable and punctual. It reduces air pollution and it is elevated so you get a really good view and can see the geography of China. China puts infrastructure in place for businesses to thrive. I can't see why it won't be the major driver of world economic growth going forward.


The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.