How to Invest in a Changing China

“中国需要了解更多关于世界的更多信息，世界也需要了解更多关于中国的信息。”—Xi Jinping, president of the People’s Republic of China

In an effort to follow Xi’s recommendation “to learn more about China,” I recently made a trek back to the country to gain further insights into the macro trends shaping China during what we at KKR view as one of the most complex times in recent Chinese history. Incidentally, many of the Chinese with whom I spoke increasingly want “to learn more about the world,” eager to better understand how the global economy might affect their businesses, particularly as China works not only to further open up its economy but also to stand even taller on the global stage.

Overall, we left China with much greater appreciation that there are some noteworthy structural shifts unfolding. New trade and export initiatives are almost entirely focused on gaining share in high-value-added segments of the markets, versus defending existing low-value-added enterprises. China’s burgeoning e-commerce sector is well positioned to disintermediate key parts of the old economy. And many global services–based businesses in China are growing faster than local traditional fixed-investment enterprises.

Here are some of our key macro-related investment conclusions:

• Fixed-asset investment as a percentage of GDP has peaked. This is not because FAI has become an outsize proportion of GDP but rather, we believe, because environmental concerns — by becoming more important than job creation — are now driving public and private corporate behavior.

•在这一背景下，政府正在制定私营部门，为能够利用少数环境问题提高中国的服务的更多资源。此外，更大的服务部门将有助于削减 - 在该国过于杠杆公司部门的总体上。

• Despite lower oil prices, energy efficiency remains a major focus. As of 2014, our research shows,oil demandis growing about 0.69 percent for every 1 percent of GDP growth, which is significantly lower oil intensity than the 0.94 percent ratio that prevailed ten years ago. We see it falling even further, underscoring that China appears to be making progress when many of its emerging-markets peers are not. That said, we still forecast that China will account for a full 36 percent of incremental global oil demand through 2018.

•我们不会查看中国人民银行的最近裁定，因为传统智慧相反，中国人民银行为中国经济提供了大量刺激。事实上，我们认为最近的速率削减主要是旨在减缓现有公司部门的不完整贷款形成，特别是工业部门削弱。

• Reforms, including反腐败举措尽管他们对GDP增长的近期寒冷影响，但在金融服务竞技场中继续获得势头的更大透明度。好消息是，比较在许多硬击地区，包括高端酒店，豪华零售商和餐馆。可能更重要的是：我们看到政府正在抵制当地一级的信贷风险的赌注。

• China’s Internet economy is having a profound effect on traditional commerce. Indeed, online retail in China is already larger than that in the U.S. A key reason for the country’s rapid success, we believe, is thatChina’s large Internet companies面对传统供应商的竞争远远不如其他国家。

• Though it may pause, we do not believe that the rally inmainland China–listed A shares结束了。股权发行是取消救球过程中的一个关键变量。所有其他都是平等的，更高，不较低，价格对中国领导更为理想。此外，从资产分配角度来看，低通胀环境有利于房地产的股票，传统上被视为抵抗高通货膨胀和低存款率的有效对冲。

We still believe investors should generally avoidhard commodities除非they are a low-cost producer and provide some value-added. Simply stated, we believe that the fallout we are seeing in areas such as steel and iron ore is secular, not cyclical.

In our view, health care, environmental remediation and the Internet are all likely to see not only strong growth but also multiple reratings upward. China will need to use additional liquidity measures to stave off strong disinflationary pressures. Thus we believe that Chinese stocks with compelling dividend yields and reasonable earnings growth are likely to be strong performers in 2015.

在债务和重组方面，似乎有巨大的机会在帮助中国而且在澳大利亚这样的国家，Brazil和加拿大，我们相信赌注的所有这些都太大了sustainability of the China miracle. For our nickel, the fallout from China’s fixed-asset investment slowdown could be one of the largest opportunities across the global capital markets over the next five years.

Henry McVey is the head of global macro and asset allocation atKKR.在纽约。

Read more ofMcVey’s views on China.

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