Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping.

China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping. 

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy.

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy. 

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by <a href="https://www.smartkarma.com/entities/jiangsu-hengrui-medicine-co-ltd" target="_blank" data-smartkarma-citation="entities:14128:1" rel="noopener">Jiangsu Hengrui Medicine (600276 CH)</a>, one of the standout domestic holdings within the Health Care sector, followed by <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> and <a href="https://www.smartkarma.com/entities/luxshare-precision-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:12310:1" rel="noopener">Luxshare Precision Industry (002475 CH)</a> .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by Jiangsu Hengrui Medicine (600276 CH), one of the standout domestic holdings within the Health Care sector, followed by China Tourism Group Duty Free Corp Ltd (601888 CH) and Luxshare Precision Industry (002475 CH) .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

China's Next Generation:  Diversifying Away from Tencent and Alibaba.

Since China's imports from the US are down in the year-to-date (and 15% lower than in 2017), the target of a US$64 billion increase in those imports in 2020 relative to 2017 is likely to be missed by a wide margin. Tariffs on US imports from China have, however, helped reduce China's exports to the US. So, October 2020 is likely to witness a ratcheting up of trade tensions, as the US widens the tariff net to a larger proportion of US imports from China. Taiwan, Vietnam, Singapore, Thailand are likely to continue gaining from the diversion of US imports from China.  China's imports of products covered by the Phase 1 trade deal for the year-to-date (January to August 2020) are just half the prorated level of imports required by that trade deal. Overall imports of goods and services were supposed to be US$200 billion higher than those of 2017 (goods imports US$63.7 billion higher), but China's total goods imports from the US are down 15% from 2017 (and also down from their 2019 levels), falling shambolically short of the agreed targets.The US' bilateral trade deficit with China is still down 18% YoY, but almost entirely because the existing tariffs on imports from China have caused China's exports to the US to decline 15% YoY in the year-to-date (similar to their 16% YoY decline in 2019). So the verdict is clear: China has fallen egregiously behind the targets for imports from the US that it agreed to in the Phase 1 trade deal, but the tariffs imposed by the US have helped reduce US imports from China -- and that alone has allowed the bilateral trade deficit to continue to decline in 2019 and in Jan-Aug 2020. The policy implication is obvious: since tariffs work, the US should widen the scope of those tariffs (partly as a punitive measure against China's failure to comply with the Phase 1 targets for increased imports from the US). While the scheduled time for any such action was expected only after the 3rd November presidential election, it is much more likely that a widening of tariffs will be announced in October 2020 -- given the egregious shortfall relative to the target. And were Biden to win the presidency, he is unlikely to withdraw the Trump tariffs, although his subsequent measures will be less onerous for China than they would be under a continuation of the Trump administration's current policies. The main beneficiaries from any diversion of trade from China will continue to be Vietnam and Taiwan -- plus other Southeast Asian economies like Singapore, Thailand and Malaysia -- which have continued to see increases in their exports to the US this year, aided by their relative success in fighting Covid-19.

Since China's imports from the US are down in the year-to-date (and 15% lower than in 2017), the target of a US$64 billion increase in those imports in 2020 relative to 2017 is likely to be missed by a wide margin. Tariffs on US imports from China have, however, helped reduce China's exports to the US. So, October 2020 is likely to witness a ratcheting up of trade tensions, as the US widens the tariff net to a larger proportion of US imports from China. Taiwan, Vietnam, Singapore, Thailand are likely to continue gaining from the diversion of US imports from China.  China's imports of products covered by the Phase 1 trade deal for the year-to-date (January to August 2020) are just half the prorated level of imports required by that trade deal. Overall imports of goods and services were supposed to be US$200 billion higher than those of 2017 (goods imports US$63.7 billion higher), but China's total goods imports from the US are down 15% from 2017 (and also down from their 2019 levels), falling shambolically short of the agreed targets.The US' bilateral trade deficit with China is still down 18% YoY, but almost entirely because the existing tariffs on imports from China have caused China's exports to the US to decline 15% YoY in the year-to-date (similar to their 16% YoY decline in 2019). So the verdict is clear: China has fallen egregiously behind the targets for imports from the US that it agreed to in the Phase 1 trade deal, but the tariffs imposed by the US have helped reduce US imports from China -- and that alone has allowed the bilateral trade deficit to continue to decline in 2019 and in Jan-Aug 2020. The policy implication is obvious: since tariffs work, the US should widen the scope of those tariffs (partly as a punitive measure against China's failure to comply with the Phase 1 targets for increased imports from the US). While the scheduled time for any such action was expected only after the 3rd November presidential election, it is much more likely that a widening of tariffs will be announced in October 2020 -- given the egregious shortfall relative to the target. And were Biden to win the presidency, he is unlikely to withdraw the Trump tariffs, although his subsequent measures will be less onerous for China than they would be under a continuation of the Trump administration's current policies. The main beneficiaries from any diversion of trade from China will continue to be Vietnam and Taiwan -- plus other Southeast Asian economies like Singapore, Thailand and Malaysia -- which have continued to see increases in their exports to the US this year, aided by their relative success in fighting Covid-19. 

The Trade War Is Set to Worsen, as China Falls Far Short of Meeting Phase 1 Targets

Between 1946 and 2011, global trade volumes typically grew at least 1.5-times the pace of global GDP growth, except during years of global recessions. But since 2012, global trade has grown at or below the pace of global GDP in all years (except 2017). This stagnation in global trade is the most prominent symbol of De-Globalization -- and it preceded the advent of the Trump presidency by 4 full years. The headlines speak about "trade wars" allegedly weakening global trade; in reality, the trade wars are a consequence of already-weakened global trade. Since Trump didn't cause the stagnation in world trade, his possible electoral defeat will do nothing to boost world trade.   
The "commodity super-cycle" of 2002-1H 2011 resulted largely from China's insatiable demand for commodities, at a time when China's breakneck pace of capacity expansion (while it already faced domestic overcapacity in most industries) was resulting in a surge of Chinese production and exports that was crowding-out other global producers. Since 2012, China's imports have stagnated (growing less than 7% each quarter, and declining outright in 2014-16 and 4Q 2018-1H 2020) -- and this has been the main factor causing global trade volumes to grow no faster than global GDP during those periods. In 2017, China allowed the Renminbi to appreciate, thus boosting its imports (+15.9% YoY) that year, and global trade grew at 1.5x global GDP in 2017. The backlash against immigration began in 2011 with the election in Singapore (poster-child of Globalization), and Singapore has since steadily reduced net inflows of foreign workers and immigrants (new citizens and PRs), with no new net employment growth between the 2015 and 2020 elections. 
Global trade volumes can only resume growing faster than global GDP once China has been obliged to rationalize its domestic industrial capacity -- thus creating room for other major economies to resume capacity-expansion, which in turn will generate new sources of global trade in intermediate and capital goods. Ironically, a Biden administration is unlikely to oblige China to begin such a rationalization (as Biden failed to even mention China in his acceptance speech at the Democratic National Convention, suggesting China-trade is not a priority issue for him); so a Biden presidency will actually prolong the period of sluggish global trade volume growth. The lower-probability outcome of a Trump victory, however, by forcing through a Phase-2 trade deal with China, will impose duties on virtually all Chinese exports to the US (with other economies also likely imposing anti-dumping duties on Chinese products) thereby forcing the rationalization of China's industry that is a necessary precondition to any recovery in global trade volume.

Between 1946 and 2011, global trade volumes typically grew at least 1.5-times the pace of global GDP growth, except during years of global recessions. But since 2012, global trade has grown at or below the pace of global GDP in all years (except 2017). This stagnation in global trade is the most prominent symbol of De-Globalization -- and it preceded the advent of the Trump presidency by 4 full years. The headlines speak about "trade wars" allegedly weakening global trade; in reality, the trade wars are a consequence of already-weakened global trade. Since Trump didn't cause the stagnation in world trade, his possible electoral defeat will do nothing to boost world trade.   
The "commodity super-cycle" of 2002-1H 2011 resulted largely from China's insatiable demand for commodities, at a time when China's breakneck pace of capacity expansion (while it already faced domestic overcapacity in most industries) was resulting in a surge of Chinese production and exports that was crowding-out other global producers. Since 2012, China's imports have stagnated (growing less than 7% each quarter, and declining outright in 2014-16 and 4Q 2018-1H 2020) -- and this has been the main factor causing global trade volumes to grow no faster than global GDP during those periods. In 2017, China allowed the Renminbi to appreciate, thus boosting its imports (+15.9% YoY) that year, and global trade grew at 1.5x global GDP in 2017. The backlash against immigration began in 2011 with the election in Singapore (poster-child of Globalization), and Singapore has since steadily reduced net inflows of foreign workers and immigrants (new citizens and PRs), with no new net employment growth between the 2015 and 2020 elections. 
Global trade volumes can only resume growing faster than global GDP once China has been obliged to rationalize its domestic industrial capacity -- thus creating room for other major economies to resume capacity-expansion, which in turn will generate new sources of global trade in intermediate and capital goods. Ironically, a Biden administration is unlikely to oblige China to begin such a rationalization (as Biden failed to even mention China in his acceptance speech at the Democratic National Convention, suggesting China-trade is not a priority issue for him); so a Biden presidency will actually prolong the period of sluggish global trade volume growth. The lower-probability outcome of a Trump victory, however, by forcing through a Phase-2 trade deal with China, will impose duties on virtually all Chinese exports to the US (with other economies also likely imposing anti-dumping duties on Chinese products) thereby forcing the rationalization of China's industry that is a necessary precondition to any recovery in global trade volume. 

Trump Is Not the Cause but an Effect of De-Globalisation; No Magical Rebound in Trade

China

iShares MSCI China ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the performance of the MSCI China Index. The Index is a free float adjusted market cap weighted index designed to measure the performance of equity securities in the top 85% in market cap of Chinese equity markets, as represented by the A-Shares, H-Shares, B-Shares, Red Chips, & P-Chips.

iShares MSCI China ETF (MCHI US)

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

China rode the global liquidity wave since 4Q 2008. Now that the tide is turning (amid soaring US core inflation), industrial overcapacity and anti...

Prasenjit K. Basu

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

Net capital outflows were US$179bn in Apr-Dec 2020 despite the rising RMB; in Jan-Feb 2021, outflows were $115bn. The surge in FAI is creating...

Prasenjit K. Basu

China's Next Generation: Diversifying Away from Tencent and Alibaba.

China exposure is becoming more concentrated in a small number of large cap stocks. We identify the next generation of China stocks by analyzing...

Steven Holden

The Trade War Is Set to Worsen, as China Falls Far Short of Meeting Phase 1 Targets

China's imports f

Prasenjit K. Basu

Trump Is Not the Cause but an Effect of De-Globalisation; No Magical Rebound in Trade

Between 1946 and 2011, global trade volumes typically grew at least 1.5-times the pace of global GDP growth, except during years of global...

Prasenjit K. Basu