Why I Invest in China

I don’t know how observant you are but I have been observing increasing influence from China firms in Singapore. And it isn’t just Huawei phones.

For one, my flat was built by China Construction (Rich Construction is her subsidiary).

You would also see many tunnelling and MRT projects have more Chinese companies involved, vying for market share from Singapore, Korean and Japanese companies.

You have companies like Shanghai Tunnel Engineering…

… China Railway 11 Bureau Group…

… China State Construction Engineering Corporation…

… China Railway Tunnel Group.

You get the idea. The Chinese companies are growing their influence even in our tiny country and they are building our critical infrastructure.

Even Jewel and Terminal 1 use Midea aircon.

But don’t get me wrong. I’m not in the ‘Singapore-Government-never-take-care-of-Singaporeans’ bashing camp. I am a lot more positive than that. Instead, I see China’s internationalisation as an opportunity. We have to accept their growing influence and turn it into our advantage. Instead of resisting, I prefer to invest in Chinese companies and participate in their growth toward multinational corporations.

My observation of the Chinese influence doesn’t end in the public sector.

The Chinese influence is spreading in the private sector too just that they aren’t as obvious as the public ones.

Once I was talking to Saxo Capital, the brokerage firm in Singapore, only to discover that Geely (the Chinese car company) is a major shareholder with more than 50% stake! (Don’t ask me about the connection between a carmaker and a brokerage firm. Beats me too.) But the behind-the-scene influences are much harder to detect and leaves you wondering how many more companies are actually owned by the Chinese.

Chinese companies are not just present in Singapore. Their tentacles are spreading throughout the world. You will read about major acquisitions by Chinese companies from time to time and here’s a recent one: Mengniu is acquiring Australia’s infant formula milk producer, Bellamy’s, for A$1.5 billion.

Expect more M&A activities as Chinese companies open their wallets to speed up global expansion.

The world is changing as we speak. I believe that the world’s superpower will change from time to time.

Singapore used to be a colony of the British Empire. That was the first superpower our grandparents witnessed. Then came WWII and the United States and Soviet Union became the new superpowers as the British influence waned. Eventually the U.S. became the sole superpower when Soviet Union collapsed. Now, China is challenging the U.S. for the title.

In one of my previous articles, The Real Singapore Inc, I mentioned that a large homogenous domestic market is a foundation for a superpower,

The U.S. has a 300 million population. The entire country is largely homogenous in terms of language, culture and political system. If a business succeeds in San Francisco, the founders could export that business model to another city with minimal tweaking. The replicability of business models to reach a large domestic and homogenous market is higher in the U.S. than anywhere in the world. This geopolitical advantage is unparalleled until recently.

And I went on to give more stats about why China would oust the U.S. to be the next superpower and build the future MNCs.

And the story of the future would be China. MNCs from China will dominate the world in time to come. As of now, 126 of the Fortune 500 companies are from the U.S. while China has 120 in the list. Soon China will overwhelm this list in a winners-take-all market. Compared to the U.S., China is less homogenous in terms of the demography. There is great wealth disparity between the cities in the coastal area and the inner regions. The saving grace is, the coastal area of China is home to 600 million homogeneous consumers. And thanks to Emperor Qin’s unification efforts more than 2,000 years ago, they speak one common language. That is double the United States’ population. With the Chinese Government building up domestic consumption in addition to being an export-oriented ‘factory of the world’, there is little doubt that Chinese companies will soon overwhelm the Fortune 500 list.

The changeover of a superpower provides a once-in-a-lifetime opportunity to invest companies with the potential to dominate the world in the future, thereby reaping multiple times the capital you invest in. It is probably the best place to put your money if your objective is to grow tremendous wealth.

In the past, only Chinese citizens and selected foreign institutions can buy ‘A’-shares directly from Shanghai Stock Exchange and Shenzhen Stock Exchange. In 2014, foreigners can invest in Shanghai A shares via Hong Kong. In 2016, the connect was extended to Shenzhen Stock Exchange. The Chinese markets are opening up as we speak and there are fewer obstacles to invest in Chinese companies today.

I know some of you would have reservations because of the poor corporate governance and trust in the financial reporting in China.

I agree that corporate governance is not on par but it isn’t that atrocious. In fact, the Chinese firms adapted the US GAAP to their own context and I found their annual reports to be very detailed compared to Singapore companies. That said, we have to do more due diligence to ensure that we have reasonable degree of trust in the reporting. I believe the potential rewards outweigh the risk at this point in time and it would be too late when an investment becomes obvious to everyone.

If it makes you feel better, the revered Charlie Munger has been investing in China for over 15 years and he said this in a CNBC interview,

The best companies in China are cheaper than the best companies in the United States.

I believe this is a tremendous opportunity to start looking at some China companies. They can be listed in Shanghai, Shenzhen, Hong Kong and even in the U.S. It is time to think bigger.

If you are interested to invest in high growth Chinese companies but are aren’t sure how to go about it or not confident to avoid frauds, you can read this article.