Made in China: The Next Tech Revolution

March 3, 2017 Fred Wang

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By Fred Wang, CFA, FSA, FCIA, FRM
Quantitative Investment Analyst

Several weeks ago, I travelled home to Beijing for Chinese New Year celebrations. While I enjoyed spending time with family and friends, I kept thinking about how the China I experienced was very different from the way it’s being portrayed abroad.

If you look at how the international media cover China and its economy, you have to wonder whether you’re getting the real picture. Most of China’s international media coverage tends to focus on the negative, whether it’s the economic slowdown, credit buildup, property bubble or capital outflow.

With such pervasive negative coverage about the country, it’s easy to miss the massive growth and investment opportunities in China today—especially in the technology realm.

Having grown up in Beijing and as a native speaker of Mandarin, I have a different view. And as an investment analyst, it helps that I can seek out first-hand information through my connections and have discussions on the ground—the essence of fundamental research.

Mobile apps are leading a wave of innovation …

When I was in China, I didn’t go anywhere without my phone—like every other person I knew. And when I looked at everyone else’s phones, they all had WeChat installed.  

WeChat has grown to be the largest and most ubiquitous social media app in the country. The Chinese tech giant Tencent, which launched the app in 2011, keeps adding more and more functionality each year. The basics include free unlimited texting, voice calling, video calling, group chats and stickers.

What I didn’t know before this trip was that it has also become a mobile wallet—WeChat Pay. One day, after ordering a quick bite at a street vendor’s cart, my cousin and I found ourselves short of cash. While I hurriedly searched on my phone for the closest ATM, my cousin simply paid for our meals by scanning the QR code on the street vendor’s WeChat Pay. (Imagine skating on the Rideau Canal and being able to pay for a BeaverTail with your phone!)

WeChat’s mobile payment platform is changing how social media and payment are starting to mingle. You can order food, pay for a cab, book travel, shop online, buy movie tickets and pay your utility bills, while staying in touch with your contacts—all by just using the app.

Besides WeChat, Tencent also earns revenues from its online gaming and advertising businesses. But it’s through the social media business that it’s making inroads into the payment and cloud businesses—both areas of incredibly high growth.

Tencent stock is owned in our MDPIM International Equity Pool, MDPIM Emerging Markets Equity Pool, MD International Growth Fund and MD Fossil Fuel Free Equity Fund™. As China transforms from a manufacturing-based economy to a consumer-driven one, Tencent is bound to reap the rewards.

… while e-commerce firms are moving into wealth management

During my trip, it seemed like every time I wanted to go shopping, someone would suggest that I buy online instead—through Alibaba, which is China’s equivalent of Amazon.com. It has a dominant position in China’s technology sector and highly profitable e-commerce business, and I expect Alibaba to continue on its trajectory of success.

One of Alibaba’s great success stories is Singles’ Day (November 11 or 11.11). It started in the 1990s as the anti-Valentine’s Day celebrated by people without a significant other. In 2012, Alibaba trademarked Singles’ Day; since then, it has become a huge online shopping holiday.

According to Grantham, Mayo, Van Otterloo & Co. LLC, our asset manager on the MDPIM Emerging Markets Equity Pool, Singles’ Day saw US$17.8 billion in sales on November 11, 2016, which was five times the sales of Black Friday in the United States.

What’s interesting about Alibaba is how it’s using its e-commerce and technology platform to expand into the wealth management platform. The company’s list of buyers and sellers plus client transaction data are large enough to easily rival that of the China’s banks. As a result, Alibaba can use its information to do credit checks, gauge their customers’ financial needs and start providing better financial services.

Like Tencent, Alibaba is owned in our MDPIM Emerging Markets Equity Pool.

Over the next few years, I believe that China’s reputation as the producer of low-quality goods will be soundly replaced by the innovations we’ll see, particularly in the technology realm.

Aside from China’s pace of growth, there will be good companies that will grow and profit from the massive economy. And at the end of the day, investing in good companies with strong fundamentals is our focus.

 

About the Author

Fred Wang, CFA, FSA, FCIA, FRM, was formerly a Senior Quantitative Investment Analyst with the Investment Management team at MD Financial Management. He oversaw quantitative research and analysis for all fixed income and equity mandates.

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