Matthews Asia interview

Natalie: Hello. I’m Natalie Kenway, editor in chief at MA Financial Media. I’m delighted to be joined by Andy Rothman from Matthews Asia, who’s recently visited Beijing and Shanghai and is going to share all about his trip with us. Thanks so much for taking the time to come and speak to us today.

Andy: Thanks. Great to be here. Thanks for the opportunity.

Natalie: So how was the trip? What were your key takeaways from the state of affairs over there?

Andy: Just great to be back in Asia after three years of not being able to travel. So earlier this year, in February, I got to spend a week in Taiwan and a week in Hong Kong and a quick trip across the border into China. But in May, I got to spend a longer period of time, a week in Shanghai, where I lived for 14 years, and then a week in Beijing, where I lived for five years. And I think the two most important things I took away from that are first, Chinese people are living with Covid just like we are. There are the occasional cases, but all of the restrictions are gone. And I think everybody is just living a normal life. There’s the occasional case, but not enough to change people’s behaviour, like here, and the government is completely relaxed about it, like our governments. The second takeaway is that I think the gradual consumer-led economic recovery, post-Covid and post-zero-Covid is continuing and it’s underway. And I think it’s really important to understand how much trauma Chinese people went through last year with the lockdowns and then Covid cases at the end of the year, so they’re slowly coming back. And we can see this, for example, that bars and restaurants were just jammed. You can see that in the data and I saw that on the ground when I was there. So we have to be patient. But I still believe that we’re seeing the Chinese economy move back to where it was pre-Covid.

Natalie: Perhaps you could remind us what is driving that consumer-led recovery. Is it just the people in bars and restaurants? I’m sure there’s more to it than that.

Andy: I think we again have to recognise how much trauma Chinese people went through last year. The first part of the recovery is just getting out and socialising again. Goods sales are starting to pick up, new home sales are starting to pick up, but they’re moving more slowly. I think that’s understandable. The other thing to keep in mind is how the government is viewing this. They seem to be pretty relaxed based on my meetings last month in Beijing and I think they’re relying on two things to get the economy back on track. One is for the government to get out of the way. They have lifted a lot of the overly restrictive rules and policies that were put in place last year and the year before. And then the second is moderately accommodative monetary and fiscal policy while the rest of the world is tightening, but mostly they’re just letting people get back to business.

Natalie: Do you think there’s any reason for the government to stimulate the economy or do you see any kind of actions like that happening?

Andy: Well, we’ve seen in recent weeks that occasionally the government’s tweaking policy. For example, one of the most important things they’ve done is that the interest rate for mortgages right now is down 140bp compared to a year ago. But the others are really about signalling minor cuts in lending rates, minor cuts in deposit rates, while at the same time the rest of the world is tightening. So I think it’s a moderately accommodative picture, but it looks very accommodative compared to our countries.

Natalie: And you mentioned mortgage rates there. What’s the real estate sector looking like? Has there been progress there?

Andy: Yeah, for me almost everything is bouncing back earlier than I expected at the beginning of the year. I didn’t think the consumer story would be this good until the second quarter and I didn’t expect to see any recovery in new home sales until the second half, but we’ve got a bit of a pick-up. So year to date, new home sales on a square metre basis in China are about 80% of where they were during the first five months of 2019 before Covid so not fantastic, but actually, for me, early stages of a recovery.

Natalie: Are there any other sectors that are taking particular leaps forward or any sectors that are being left behind?

Andy: At Matthews Asia, my colleagues on the investment team who manage our strategies are really focused on Chinese companies selling goods and services to Chinese consumers. And a lot of that is picking up quickly. I think that the manufacturing industrial part of the economy is definitely lagging behind; that really has yet to bounce back and probably won’t until the end of this year or early next year. Part of that’s because inventory has built up over the last couple of years, part of it is construction activity is weak, part of it is the rest of the world slowing down. So exporters are not all that excited. But let’s remember that last year was the 11th consecutive year in which the tertiary part of GDP, the consumer and services part, was the biggest part. So this is now a domestic demand driven, services driven economy just like ours and that part is recovering the earliest. And that’s why that’s the place where we like to look for investment opportunities for our clients.

Natalie: And what about the geopolitical tensions? Is that a huge concern in terms of investment impacts or how can investors even attempt to navigate that?

Andy: That’s a great question. It depends where you’re sitting. So I’m based in the United States now, after living in China for more than 20 years, and I’d say American investors are really focused almost exclusively on the political tensions between Washington and Beijing. But I’ve been in the UK recently, I’ve just come back from Israel and Dubai, and I would say in all of those places, investors are much more focused on the economics and less on the politics. Now, I think there’s almost zero chance of US-China relations improving in the next couple of years. And a lot of my view is coloured by having spent 17 years in the US Foreign Service and the State Department before I got into this industry in 2000. But I think investors outside of the US are much less concerned about that. And the other thing I would emphasise is I think these political tensions are unlikely to turn into a crisis because I really don’t think either government wants that. And also, it isn’t likely to derail the economic recovery because, as I mentioned before, the biggest driver is domestic demand. Exports are a small part of the economy and even the sanctions are having a limited effect on the overall economy. So I think that one of the things that investors sometimes make a mistake about is misunderstanding the trajectory, the economic recovery, and misunderstanding the potential impact of the political tensions between Washington and Beijing on the Chinese economy.

Natalie: On that note, to finish off, what would you say your outlook for China is? It sounds like you’re pretty optimistic.

Andy: I am. I’m probably one of the more optimistic people out there. And I think part of the reason is that I’ve been following China since the early 1980s when the place was a disaster. I mean, if you’d ask me when I first went to China in 1980 as a student, or I went back as a very junior American diplomat in 85, would China be as exciting as it is today, as wealthy as it is today? I would have said no way. So that lends me to generally be relatively optimistic, but also because in recent decades, I think Chinese people, Chinese entrepreneurs are really resilient and they’re bouncing back already. And I also think the government is really pragmatic. So I think if we’re patient and recognise that this economic recovery from Covid is going to take some time, I think investors can be rewarded for that.

Natalie: Great. Well, thank you very much for sharing the insights of your trip and to have you here.

Andy: Great to be with you. Thank you