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CFA Institute: A New Investment Thesis for China

March 17, 2012

Last week, I gave a speech to the CFA Institute Asia Pacific Investment Conference in Hong Kong, on “The Investment Thesis for China.”  One of the Institute’s members, C.K. Lee, posted this excellent summary of my talk on  You can access the original here

As I joked to the delegates, this was probably the first and last time they would see a PowerPoint slide devoted to Marx’s dialectic at a conference for CFAs.  I’m about as far from being a Marxist as one could imagine, but Marx stole his thesis-antithesis-synthesis framework from the German philosopher Hegel anyway.  So I’m actually offering a Hegelian take on China’s economy, not a Marxist one, in an attempt to get beyond the conventional bull/bear debate.

At the inaugural CFA Institute Asia Pacific Investment Conference earlier this week, Professor Patrick Chovanec of Tsinghua University School of Economics and Management analyzed the investment thesis for China by taking an unusual tact: he applied the “thesis, antithesis, synthesis” dialectic that is often associated with the work of Karl Marx.

The professor’s synthesis, or conclusion, was that “an imminent correction to China’s economy will create promising opportunities in dynamic new sectors,” including agriculture, logistics, retail, consumer brands, and health care.

Chovanec is a prolific blogger and has analyzed many aspects of the Chinese economy, from concerns about housing market imbalances in 2009 to worries about inflation in 2010. He counts himself among those predicting a “hard landing,” but readily admitted to being conflicted about China’s future, telling delegates: “I don’t really feel that comfortable wearing a bear suit.” That’s because Chovanec sees huge untapped potential in the economy of China, a country he first visited in 1986 (he has since traveled to each of the country’s 31 provinces, as well as Taiwan). Chovanec’s use of the thesis, antithesis, synthesis framework is borne of an attempt to reconcile these competing views.

Chovanec began his presentation by describing the prevailing thesis for China: that the country is on the verge of a profoundly disruptive economic adjustment; in other words, that the old “China story” is over. This story had been based on the premise that China would experience growth for as far as the eye could see, and that the rising economic tide would lift all investors, as long as they had exposure — any exposure. Unfortunately, the dangers of this story became all too clear during the global financial crisis, which showed that China’s export-driven model had reached its limits; that its over-reliance on investment was generating bad debt and inflation; and that any delay in the day of reckoning would only heighten the risk of a hard landing. Chovanec also pointed out that even a “soft landing” for China would represent profound, disruptive change at a micro level.

Delegates listen to Patrick Chovanec of Tsinghua University School of Economics and Management at the CFA Institute Asia Pacific Investment ConferenceOf course “hard landings,” otherwise known as economic corrections, are sometimes necessary in order for economies to reverse imbalances and return to health. This observation points the way to Chovanec’s antithesis: that “the very inefficiencies that have provoked a crisis offer immediate opportunities for companies and investors who are smart and prepared.” These opportunities include short positions, private financing, purchasing fire sale assets, and participating in distressed workouts. Short positions are the most obvious way to profit and have paid off for many hedge funds, Chovanec said, but they are not easy to execute in the Chinese market. He noted that private financing remains attractive because of the inefficient allocation of capital in China, and the fact that many companies that could earn a return have trouble obtaining capital. (Conversely, the private equity market in China has been flooded with capital, he said.)

Chovanec then turned to his synthesis, walking delegates through the case for each of the dynamic sectors he identified as offering promising opportunities. Of these, he said, none are garnering enough attention from entrepreneurs or government policymakers. Since the retail sector is largely staffed by unskilled labor, he suggested that the potential exists for companies to add value to the buying experience. He also pointed out that China still has very few national retail brands. In addition, he argued that logistics services and “containerization” were potentially lucrative because they hold the key to “massive productivity gains” in China. And Chovanec noted that health care suffers from a lack of capital even though China’s aging population will create demand for services such as retirement homes and assisted living.  [The other key sector I discussed, but was omitted from this summary, was agriculture].

14 Comments leave one →
  1. Hua Qiao permalink
    March 18, 2012 6:40 am

    I am not sure the Hegelian concept works so well in China. Seems more like thesis, antithesis repeatedly with no synthesis. In my less elegant analogy, it’s more like the car careening from one side of the road to the other.
    BTW, do you know western firms that have been successful in collecting on acquired distressed debt in China? I am curious. Is that what the StanChart and UBS “strategic investments” in Cinda are all about?

  2. March 18, 2012 10:39 am

    Marx “stole” Hegel’s dialectic? Did he offer any modifications? I don’t suppose the author intended to cop to thievery or accuse Chovanec of same. It’s funny. 😉

    • prchovanec permalink*
      March 18, 2012 1:15 pm

      I said I was joking. Marx “stole” it from Hegel, and I “stole” it from both of them. Guilty as charged.

  3. Joy permalink
    March 19, 2012 12:33 pm

    Red ties do you disservice. Please consider a change… 🙂

  4. March 19, 2012 5:19 pm


  5. punch permalink
    March 19, 2012 6:25 pm

    where can we find the presentation copy?

    • princess1960 permalink
      March 25, 2012 10:16 pm

      princessnameA-Hungary i like her butique..Arisma 2/9/10 is just emotional how she was very simple….

  6. Y Kai permalink
    April 7, 2012 11:37 am

    Wonder what the audience would think if they knew that you are not a China expert, but simply a blogger on issues involving China.

    Or any other topic.

    By the way, how did you manage to convince the Los Angeles Times that you are suddenly a “political analyst” of China?

    Weren’t you recently an expert on Chinese real estate? Aren’t there tests for that?

    • princess1960 permalink
      April 7, 2012 4:18 pm

      for sure you are not joke with every blog you write ..iam very impressive for every detal you said about CHina ..i have to apolagize if my comment was out the topic or political true in chine have more posibility for invest..but this is and one risk for everyone wanted to do ..
      to have success/// businessmen first need to find emergine market..and this is not chine..but Taiwan.Vietnam….my comment is sometime out themes.this mean i have to be carefull what iam writing ..but you know what? are everywhere aroundme and this make me confusse with who realy i write..if the all problems or business find resolution just with e-mail .why you travel?..thank you..

    • princess1960 permalink
      April 9, 2012 2:34 pm

      thank you professor .you insisst in your intres i am insisst to my phon doesn’t have sinial..or better the original (your to be front of me)? al my mail al my lap-top is undercontrol so i have to thrue out my hart see how perfect is…?


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