Awakening the Dragon: China Consumer trends & the next big bets

Ram Ahluwalia & Timothy Chen

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Episode Description

Join us as we dive into: China: Bull or Bear? Key indicators, Top investment themes in China, KWEB vs. CGRO: What's the difference?

Episode Transcript

[00:00:00] Hey Tim, how are you? Good, good. How are you Ram? I'm doing well. Thanks for joining us today. I'm really pleased today to be joined by Tim from CVA funds. So CVA has got a team of analysts on the ground in China. They've also launched an ETF focused on thematic investing opportunities in China. And we're going to unpack that today.

Ben was also going to join. He was on the line just a second ago. He's in the Middle East right now. The connection wasn't that great. So we'll speak to Ben another time. I did spend a few hours with Tim prior to this, so I'm really excited about what we're going to unpack. So some headline themes. Broadly, we're going to look at the question of China.

Is it FUD or is it opportunity? What are the challenges? And I think a lot of that's been discussed around Evergrande and the housing sector. Where are the opportunities? Particularly around the domestic consumption market. When do consumers start [00:01:00] spending, how to express that, how to approach that.

We're also going to talk about consumer trends in China. China is ahead of the U S on e commerce and cashless society. I saw that myself when I visited in China. We're going to talk about that fast casual, there are a lot of interesting trends underneath the surface, shopping via TikTok, et cetera, so we can get into that as well.

So stay tuned. Tim, do you want to introduce CVA Funds and yourself? Yeah. Thanks so much, Ron, for having me here. By quick way of background, CVA Funds is Core Values Alpha Funds. Taking a step back, myself and Ben come from more of a traditional venture capital background. We have historically run and managed venture capital in the past 10 15 years.

Ben is a manager partner I joined on later, investing both across US and the Chinese ecosystem. We've been in most of the nodal tech leaders from Uber, [00:02:00] Palantir, Airbnb to their equivalents such as Meituan, Didi in China. So in a way, we were also based out in Beijing through COVID and before.

So we grew up with the Chinese tech ecosystem. We know it like the back of our palms. And the genesis for looking at public equities was because we felt that ever since COVID a lot of Western media sentiment, rightfully with the trade war, et cetera, became very negative on China. But because we are on the ground here, we have a large team of analysts, we are well plugged into the right networks and understanding both the geopolitical trends, as well as technology innovation, we feel like we are benefact beneficiaries of this current narrative war, and we can spot the right alpha on the ground here, because, and in part when you think about, when folks think about China, not much is there in terms of how to think about investing in China, and rightfully so because there isn't that much content coming out of China that isn't [00:03:00] in English.

And so there's, at a very minimum level, a low hanging fruit that could be resolved, just a language barrier, but, outside of that, it's understanding how Chinese culture works, it's understanding how the behaviors of consumers work it's understanding how it's important. These tech companies are architected and have developed over time.

And we decided to launch CVA funds with our first product, CGROW, C G R O the China Growth ETF, focused on spotting the next wave of Chinese alpha via themes that we are confident in. That will drive China the next 10 years and beyond. So it's an actively traded fund and we are actively managing a couple of themes that we like early that you touched upon earlier.

And I'm super excited to go in to a couple of those more in depth. Let's dig in. So let's start off with the challenges and then we'll get to the opportunity. So I'll summarize that briefly. Everyone knows China's got real demographic issues, the replacement rate. Is around 2. 2. If you want to [00:04:00] maintain steady population, it's dropped down to 1.

1. That's one issue. We've also seen re shoring and near shoring hurt demand for China products and other countries that benefited from that. We saw in the last, month or so Chinese president, Xi Jinping visited SF and Ben from CVA funds had a chance to shake his hand. So you definitely, you're in the front row there.

And I read that as a capitulation. And of course the president also made remarks that they want to avoid conflict and quote unquote spheres of influence and all the rest. The other backdrop surrounding all this, of course, is China has quickly ramped up EV production. It went from not at all active to a dominant global leader.

We're seeing China investment in semiconductors. Outpace the United States in dollars and deal activity as well. If you could walk us, Tim, summarize the challenges [00:05:00] around the banking sector and the dynamics around how people save and, The primary form of saving is housing and where that got us today.

Yeah, so there are a couple of questions and themes there, Ram, and I will pack them one by one. First is,

sorry, Ram, can you hear me? Yeah, you were cutting in and out for a moment. Hey, can you hear me? Yeah. Sorry about that. Can you hear me now? Yes, go ahead. So there are a couple items you touched on in terms of topics. So I'll unpack them to, our ability as best as possible. So the first item of demographics yes, it is a real structural issue.

And it's funny because what's happening is, trying to stop the one child policy a couple of years back [00:06:00] is now pushing for two children policy. Actually last year, I think they started pushing for three and you get this funky dynamic where in certain cities around the holidays, your mobile provider will send you a text poetically telling you about, the sun is bright the nights are long, you should get into a couple of them and start having kids.

Imagine if T Mobile sent you that, right? That doesn't happen, but it's imperative to understand how this fits with the China context, which is. The Chinese propaganda or how they want to direct the top down economy comes through in this manner. I always joke that if they want to reboot the demographics, they just have to make it so that, you must have three kids before you're qualified to buy a house, right?

You'll start to see kids popping up left and right. But that's because at its fundamental level, housing has always been the stalwart or the foundation of Chinese growth in the past 20, 30 years. But quickly, before I jump into that, on demographics, one thing interesting to note is, China does have this demographics issue, and I think it doesn't behoove us to think, to bet 10, 20 year trends, in that sense, because [00:07:00] tactically, too many things are moving at one piece, but what's interesting about that is, you have an over graduation, or over supply of college graduating, I think, the, Students from China, right?

And it's at a pace where I believe sometimes in the first year cities like Beijing, Shanghai, they are making less money upon graduation than blue collar workers. There's just a imbalance in supply. And what that means is these technology companies doing R& D, deep tech, et cetera, can hire PhDs for much less than what they're getting in the U.

S. Obviously, there might be a disparity between the quality and depth, but I think it's that's more around, are you able, China's advantage is being able to iterate and ship products out faster. So that's our thinking on demographics. The challenge is there. But we see that the government is taking active measures to fix it, and it's a very long term thing that, you know, in between there's still a lot of alpha opportunities.

Real quick, is there an actual and official three child policy? What does that mean? There's no official three child policy, but they are starting to [00:08:00] push guide Softly for families to start having two children. This was a couple of years back and now pushing and softly guiding for three because they know it's a challenge.

Understood. Got it. So do you want to walk us through, the housing buildup that led to the recent crisis? I think the main takeaway is that people's primary form of savings was buying a house. If you want to get married in China, you have to have a house, or after you get married, you move into a house.

And if you have extra savings, you go buy another house. Is that a, is that an accurate summary? That's the culture. Of savings in China. Exactly. It's almost this joke where China's GP growth is based on this Ian bargain via housing investments, which really is, there was a strong selling this propaganda of you must have a house before you can marry.

And that really pushed the the growth at all. Powerful. That's a powerful cultural driver. If you want to get married, you have to have a house . Exactly. Exactly. So you know, I won't get into all the nitty grittys. I think there's a lot of Sure. [00:09:00] Yeah. Question marks out there and it's hard to decipher, but what gives us comfort is that a couple of points.

First is that I believe recently in the news that PAG started striking a private deal around I think it was WANDA. So you know, they reached an agreement around pre IPO around rescuing them so that they don't default on the 4 billion repayment. So that's one thing where it shows that private market forces are enacting.

PAG is a large. Private equity fund, I, I think based out of Hong Kong, but basically private market forces are coming in I think in the last couple of economic forums and meetings, the central government has assuaged fears in local government that they will intervene, but they haven't had to yet, and a lot of local governments are currently Finding ways to refinance so that they can keep the housing situation under control.

I think one thing to note here around housing is even though Chinese put a lot of their savings into housing, the [00:10:00] barrier to buy houses in China is very different than the U. S. Whereas in the U. S., The standard is, what, 10 percent down payment, sometimes even 5 if you were in a low interest rate environment.

In China, historically, it's been 20%, sometimes even more. These individuals have a lot more equity locked up in the housing. There's always an argument where if there is a crash, it won't be as bad because you don't have a bunch of rehypothecated debt that's rolling over each other. The challenge is more because imagine if 30, 40 percent of your, if not more, of your wealth and assets are locked up in housing and housing prices for the past 30 years have only gone up, suddenly it's flatlined, if not, come down a little bit, people get spooked.

So the real challenge is, Until there is clear path forward on policy, property stabilization, consumer spending confidence is down. Now, consumers have saved a ton of money the past couple years relative to their counterparts in the U. S. [00:11:00] Whereas, the U. S., the Fed were handing out stimmy checks, China was in complete draconian lockdown, where people were not allowed to go anywhere, I myself was stuck there during that period.

And it really wasn't much to do. You could say there were, you could buy products online via these e commerce companies, but you couldn't, there was no leisure. You weren't really going out because there were so many friction points that disallowed people from traveling. The way we see it is, yes, there is a challenge in the properties sector, and it's anyone's guess how that will play out.

But I think a lot of that fear has been priced in if you look at where a lot of non Chinese internet names are trading relative to the S& P. And then, so where our stance is, okay we expect to see some clarity come early next year. And that will set the stage for, you and I talked about, almost a second reopening of China where, once Property is stabilized.

Consumer confidence comes back. The spending comes through. Now, then the question is, where will the Chinese emerging middle class start spending? And that's where our [00:12:00] baskets and themes are focused on. And just to frame it up, the average savings rate in China in prior years was around 30 percent as compared to the United States, where it's around 2%.