Infrastructure investments in China


China infrastructure investment model under fire

Does infrastructure investment lead to economic growth or economic fragility? Evidence from China

About that China infrastructure paper that is making the rounds


A research at Oxford university finds:

More than half of Chinese infrastructure investments have “destroyed, not generated” economic value as the costs have been larger than the benefits

One argument has always been that infrastructure investment has been a major driver of Chinese economic growth over the past 35 years, 

especially given the fact that recently China relies on state enterprises as policy tool to stimulate economic but been seen as thwarts effort to boost efficiency [1]


The aim is surely to prevent a sharp slowdown.

This time differs from the stimulus launched in 2008, which focused on using credit expansion to fund construction of new factories -> that included an investment boom by private companies, which account for 88 per cent of all manufacturing investment.

By contrast, 72 per cent of infrastructure investment comes from SOEs.

And this is all because currency policy no longer works

see “They are turning Japanese”

But there are also some defenses:

“Strong state-led infrastructure investment does not aggravate overcapacity,” “By creating final demand, it helps digest the inventory of industrial goods, as well as buffering overall investment and GDP growth. “

while “sliding private and manufacturing investment suggests the country has been on the right track of cutting excess capacity”


Therefore a debate is needed over the viability of China’s infrastructure-led growth model. 

The favorite criticize for westerns has always been the debt:

China debt load reaches record high as risk to economy mounts


Although some still insist “At the current rate of expansion, it is only a matter of time before some banks find themselves unable to fund all their assets safely,”


But over long years many have given up an acute financial crisis, rather predict a chronic, Japan-style malaise in which growth slows for years or even decades. [2]


Case of Japan seems somehow convincible


“The most obvious example is Japan after 1990. It had too much debt, all of which was domestic, and as a consequence its growth collapsed.”

Thus, many are now concerned that China’s debt could lead to a so-called balance-sheet recession — a term coined by Richard Koo of Nomura to describe Japan’s stagnation in the 1990s and 2000s.

When corporate debt reaches very high levels, conventional monetary policy loses its effectiveness because companies focus on paying down debt and refuse to borrow even at rock-bottom interest rates.


Let’s turn back to the paper

The core of the paper is an examination of the performance of individual infrastructure projects in China, which the authors compare to projects undertaken in other countries.

They find that infrastructure projects in China often cost more and take longer to complete than expected, and that planners often do not accurately forecast demand for the completed projects.



The basic ideas are:

“Far from being an engine of economic growth, the typical infrastructure investment fails to deliver a positive risk-adjusted return”

Hypothesis 1. Due to a propensity to cost overruns and benefit shortfalls, the typical infrastructure investment destroys economic value.

“Poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China. We predict that, unless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis.” 

“It is a myth that China grew thanks largely to heavy infrastructure investment. It grew due to bold economic liberalisation and institutional reforms, and this growth is now threatened by over-investment in low-grade infrastructure” [3]

Three quarters of all projects suffered a cost overrun, which has exacerbated the debt problem



They estimate three quarters of all projects suffered a cost overrun, which has exacerbated the debt problem ->  a third of China’s $28.2tn debt load is attributable to such overruns.


“China’s relatively low official government debt-to-GDP ratio understates the actual debt burden the government carries for the following two reasons: corporate borrowing (125 per cent of China’s GDP) and financial institution borrowing (65 per cent of China’s GDP) are dominated by state-owned or state-controlled entities. The liabilities of these state-linked entities are ultimately governmental in nature if a liquidity crisis were to manifest.”

Ok no more debt, let’s check the infra itself

“The study is based on a sample of 95 road and rail infrastructure projects in China between 1984 and 2008. “


Here’s a big but basic problem that one could dissent: they are roads and rails!

“Even if an infrastructure project does not directly generate enough cash flow to cover its financing costs, they argue, positive externalities can spur enough economic activity that makes the project worthwhile.

“For most of the past few decades, the bulk of Chinese infrastructure investment has served the overall economy reasonably well. If you compare China with most other developing countries, they would love to be in China’s shoes in terms of having all that infrastructure”

But one can still accuse for diminishing returns from additional infrastructure, as well as problems with excessive and wasteful infrastructure investment, 

though a crisis looks less likely

“The authors’ data on individual infrastructure projects tell us that China is basically no worse and no better than the rest of the world in terms of managing infrastructure projects — just like everywhere else, they often run behind schedule and over budget”


And we actually have more attacks to this paper from economists:

“if China is no better and no worse than the rest of the world at planning and executing infrastructure projects, it is hard to see how this would lead it into an infrastructure-driven financial crisis. The problem must therefore surely be that China is spending far too much on infrastructure”

“But they don’t. In fact they present absolutely no statistical information about the level or growth rate of infrastructure spending in China. Instead they present the usual numbers about the rapid growth of total investment and debt in China, such as the figures on gross fixed capital formation in the national accounts. It should hardly need pointing out that gross fixed capital formation is not the same thing as infrastructure spending; infrastructure is only one component of gross fixed capital formation, most of which is housing and business capital expenditure.” [4]

Rather, a real issue should be:

Chinese infrastructure projects generate low financial returns, but have to repay debts at interest rates that are far too high. 

the average return on assets of state-owned enterprises in infrastructure sectors is around 2%
the average interest rate that state-owned enterprises pay on their debt is around 5%.
the magnitude is sizable: 6-7 trillion yuan a year


By channeling a lot of essentially public-sector borrowing through financing channels normally used by private companies, China has created a large financial problem.

-> if the government does not want the projects to default then it needs to restructure the debt into lower-cost government obligations [5]



Many analysts now believe the best hope for dealing with inefficient SOEs is not to change them from the inside but to shrink their relative share of the economy. That means opening up protected industries to competition from private business and reducing the many advantages SOEs enjoy, especially access to finance.

“I don’t think SOEs can be ‘reformed’. They can only be downsized,” “Within China’s system of state capitalism, you can have less ‘state’ and more ‘capitalism’.”


They believe the People’s Bank of China will retain its ability to ward off crisis. By flooding the banking system with cash, the PBoC can ensure that banks remain liquid, even if non-performing loans rise sharply.

The greater risk from excess debt, they argue, is the Japan scenario: a “lost decade” of slow growth and deflation.


This is [a] ‘China myth’—that the country grew thanks largely to its heavy investment in infrastructure.

<- In the 1980s, China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after—rather than before— many years of economic growth and accumulation of financial resources. The ‘China miracle’ happened not because it had glittering skyscrapers and modern highways but because bold economic liberalization and institutional reforms— especially agricultural reforms in the early 1980s—created competition and nurtured private entrepreneurship.


According to estimates by the former OECD economist Richard Herd, government and infrastructure sectors have usually accounted for 20-30% of gross fixed capital formation over the past couple of decades.


since infrastructure investment is still growing by around 20% annually, and returns on infrastructure investment could plausibly fall even further (capacity utilization at thermal power plants is already at a 20-year low due to excess capacity)



Productivity puzzle and make-work


The great American make-work programme

Osborne’s unorthodox solution to the UK productivity puzzle

Banks, businesses or the bust? Deeper into the UK productivity puzzle


UK Productivity Puzzleuk-disposable-income

The UK has outperformed at creating jobs since the crisis, yet has done poorly at boosting living standards.

<- the problem is a combination of collapsing productivity and insufficient capital investment.

uk-gdp-decompositionquality-adjusted labour input” — hours worked adjusted by education and experience

More talented people are working more than ever — UK labour input has grown at an annual average rate of 2.5 per cent since the middle of 2011— yet the reported value of what all those people are doing has collapsed.

Possible theories:

1.After financial crisis the financial system cut lending, especially to upstart businesses  [1]


But the growth rate of underlying productivity plus the capital stock had begun slowing by mid-2004.


And lending wasn’t expensive

Composition of corporate is also not a good explain, as all businesses experienced a big drop in underlying productivity since 2008. [2]


2. “general demand weakness coupled with flexible wages”

Businesses take advantage of low nominal wage growth and low interest rate to survive in a low-demand environment [3]

A solution:

Firing a bunch of low-wage workers raises the average pay of whoever is left and therefore raises measured productivity. [4]
In America, the savage cuts in employment during the crisis caused a temporary spike in measured productivity.


But American also suffers after 2010

fredgraphfredgraph-1chartMoreover, a more secular problem is
A staggering 96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity
(construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth)

and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques
(healthcare, education, government, and finance explain the remaining 50 percentage points)

Even given the fact that gap between low and high productivity industry is expanding


It’s tempting to conclude

  1. many of these additional workers are doing little to boost real living standards
  2. their continued employment is effectively the product of subsidies extracted to provide make-work, rather than the result of competitive market conditions
  3. part of the slowdown in measured productivity to these shifts in the composition of the workforce

If we check changes in employment since 2000


94 per cent of the net jobs created were in education, healthcare, social assistance, bars, restaurants, and retail, even though those sectors only employed 36 per cent of America’s workforce at the start of the millennium


Average hourly pay in these sectors, weighted by their relative sizes, has consistently been about 30 per cent lower than in the rest of the economy. (even lower considering the less work time [5] )

One could argue these are things that can’t be done either by machines or, to a lesser extent, by far cheaper foreign labour.
And aging society implies somewhat greater spending on healthcare and more employment in the sector.

A simple conclusion:

Employment booms in 21 century are no longer caused by the rapid growth of the most-productive enterprises like it used to be.



Is it something familiar? Yes, We’ve seen some picture about Japan that shows a high work participation but growth dominated by part-time labors. And don’t forget, Japan has the biggest aging problem in world and its labor productivity has been essentially flat for 20 years!



Economists at the Bank of England and the Institute of Fiscal Studies recently suggested that an impaired financial system since 2008 has prevented resources from being moved to their best uses, which in turn has dragged down output per hour by a significant amount.

Manufacturing firms in the US, Japan, and Western Europe are far more productive than firms in places like India and China because the gap between the best and worst manufacturing firms in poorer countries is much wider than in the rich world. That, in turn, is because the best firms in China and India often face constraints on their ability to expand. In theory, narrowing the gap could boost aggregate manufacturing productivity by around 40 to 50 per cent.


A fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector.

And businesses that died off in 2008 were of lower average quality than those that died off in previous years, which should also raise the overall productivity of the remaining companies.

According to the NIESR researchers, productivity growth within surviving manufacturing firms accelerated during the early 1990s.


The recent recession was different to the previous recession because productivity growth collapsed within firms. This is unlikely to be directly related to credit restrictions, which would not have prevented businesses from laying off workers. It is more likely to be associated with the lack of cost pressures, including low nominal wage growth, that allowed businesses to survive in a low-demand environment. High nominal interest rates, an overvalued exchange rate and continued wage growth in the earlier recession are likely to have incentivised surviving businesses to continue to boost productivity growth to a far greater extent than was the case in the most recent recession.

However, there is no intuitive connection between the rate of inflation (a nominal variable) and the propensity for businesses to boost productivity (a real variable) .
In fact, the 1990s consensus was price stability led to faster productivity growth because businesses could only boost profits by cutting costs with the help of technological and process improvements.

(QE might create a invisible inflation that matters for business decisions.)


If the labour on offer isn’t worth this minimum price, employers will prefer to substitute people with machines, or invest in other improvements to offset the declines in hours worked, or perhaps even endure lower sales if it means better earnings.

Hence a lot of economists are wary of raising the minimum wage too much because it would reduce employment among those who already have the lowest living standards and most volatile incomes.



And since typical jobs in bars, restaurants, and retail involve far fewer hours than normal, weekly pay packets for workers in these growing industries were more than40 per cent lower than workers in the rest of the economy. Average weekly earnings are now 3 per cent lower than they would have been if the distribution of employment had stayed the same as in January, 2000:



The stock market is vanishing


The stock market is disappearing

Activity has all but dried up in the riskiest part of the stock market

The stock market is vanishing


Buyback :

~20% of S&P 500 companies have reduced their share count by at least 4% yoy in each of the last five quarters, and that appears to be continuing into Q2:

But not completed one [1]

However, it means earnings per share is 4% higher and P/E is 4% lower than a year ago for those companies, which helped stocks outperform.


The question might be the price [2]


One thing certain: There is simply less “stock” in the stock market. 


As of the end of 2014, outstanding share count was well below where it was about 10 years ago, and the lowest in FactSet’s data set.


While net flows into US stocks have been relatively flat since 2006,  net issuance has plummeted.


The biggest factor behind the decline in IPOs is the heightened volatility in the stock market. [3]


Secondary offerings is also dropping.

Listed firms is disappearing 

The number of firms with shares publicly listed in the University of Chicago’s Center for Research in Security Prices aggregate index has fallen to 3,267 from a peak of 6,364 in 1997. Reason:

“Between the lack of IPO activity, the pick-up of M&A, and buybacks, the US equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. [4]
Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past.”





In 2015, announced buybacks are up 50% compared to 2014.

however, that the increase in announced buybacks is not bringing about an increase in completed buybacks and also notes that much of the increase in buyback announcements comes from a few big players.

For example, Apple and General Electric have both announced $50 billion buybacks this year, while the Home Depot said it would be repurchasing $18 billion worth of shares. And Gilead Sciences, Qualcomm, Pepsi, American Express, and Merck also have all announced buybacks worth $10 billion or more.[


Buying back stock is, for example, Warren Buffett’s preferred way of returning cash to shareholders (rather than paying a dividend). But Buffett thinks share buybacks make sense when stocks are undervalued.


“IPOs are a higher-risk proposition because the market isn’t totally sure of their value. So you want a relaxed market when you enter with that higher risk.”

“January and February are typically bad months for IPOs anyway,” “Typically, these companies have financial periods ending in March so they wait for that next set of statements before going to market.”


The argument is that with fewer companies to choose from, active managers are forced to crowd into certain stocks. Crowding makes it impossible to differentiate returns and causes these managers

UBS outlined 3 major trades in the market right now that seem to look a lot like bubbles: long US healthcare, short US energy, and a bet against emerging markets.






Balanced growth


Is there evidence of balanced growth?

Balanced growth in theory


The main organizing principle in growth economics over the last sixty years :
“balanced growth path”

“Kaldor Facts” [1]

  1. The growth rate of output per worker is constant over time
  2. The rate of return on capital is constant over time
  3. The share of output paid to capital is constant over time

Empirical Check


cbo_fit_postallFor the US, it seems there is very powerful evidence for constant growth of output per worker.


But not every country has such a consistent trend line.

  • a BGP is really a statement about what happens in the long run. Like Germany or Japan, you could be off of the BGP, but will eventually settle into a situation of constant growth rates.


France shows a further departure, not only a shift in the level of the BGP, like Japan, but also a change in the slope,meaning the growth rate was permanently higher.

paper recently checks 26 countries whether their path of GDP per capita follows a strict BGP:

  1. a strict BGP is only for the US and Canada
  2. no for the rest of the OECD and the other Asian countries


If return to capital is measured by take total payments to capital ratio (dividends, rents, or interest)

fig_mpk_1960There was a distinct decline in the return to capital over the post-war period

If measured by bond yields


40-year deviation from 5% between about 1970 and 2010 seems like an abuse of the word “tendency”

Or stock earnings yield.


It looks like a tendency to be around 6-8% over the long run, with a distinct dip in the recent few years.


But for UK and France, return to capital shows some stability over long periods of time.




This looks as if the capital share is rising over the last 40 years for all these countries


The inverse of this is the decline in labor shares. A paper  has investigated both if and why this is occurring.

Theoretical Issues

Uzawa’s theorem: 

If an economy has a BGP, then what Uzawa indicates is that it either has a very specific production function (Cobb-Douglas) or a very specific rate of progress in capital-augmenting technology (zero)

It feels implausible that the real world actually would have the exact right conditions

Relaxing Uzawa:

GHOS suggest is that human capital growth may be sufficient to break the strict nature of Uzawa’s conditions.
a model of economic growth that doesn’t require Cobb-Douglas production, has a positive growth rate of capital-augmenting technological change, and yet still has a BGP.

A different approach establishes conditions by which the aggregate production function may be Cobb-Douglas, even though the underlying technical production functions of firms are not.

Structural Change

There has been significant shifts of labor between sectors (generally, ag to manufacturing to services) over time in most economies.

Acemoglu and Guerrieri, Kongsamut, Rebelo, and Xie, Ngai and Pissarides, among others, are new versions of Uzawa that also allow them to account for structural change. [2]


For those countries appeared to go from one BGP to another, the existing models are good at capturing the dynamics within each BGP,
but they have no way of explaining why it was that South Korea took off for a different BGP in about 1960, or why France’s growth rate shot up after World War II. These shifts are completely exogenous in these models.





These three conditions are part of the the “Kaldor Facts” established in by Nicolas Kaldor in 1957. These facts were supported by relatively sparse information gleaned from the period running from the late 19th century up to the 1920’s, and for most of them Kaldor ignored major changes that occurred in the Great Depression.


They establish conditions for preferences or production functions that allow for economic activity to wax and wane in different sectors, but in aggregate continues to be consistent with Kaldor’s facts.

China’s Asset Management Industry


Asian asset management’s inflection point

Asset Management in China

China: The new frontier for foreign asset managers

The Asset Management Industry in China: Its Past Performance and Future Prospects


Asset Management in China and Asia are small but grow fast [0] 

スクリーンショット 2016-08-30 18.05.12スクリーンショット 2016-08-30 18.08.18

The biggest growth factor: Economic Growth

Studies shows investment assets are closely tied to GDP growth
–  Asia’s assets are likely to outpace any other region’s as Asia’s leading economies are growing twice as fast as advanced economies’ [1]

Burgeoning demand for asset management in Asia

  1. growing wealth
  2. low deposit account rates
  3. inadequate pension funds

3 drivers of growth


Financial market liberalisation is a game changer.

  1. internationalises the renminbi
  2. opens its domestic bond market
  3. liberalises interest rates
  4. launches its Shenzhen-Hong Kong Stock Connect scheme [2]

2.‘Financial deepening’

China’s onshore bond market is the world’s third-largest, and its credit market has become the second-largest.

Also see Research on China

  • China’s mutual fund industry will sustain its rapid growth as its capital markets develop further.
  • The completion of China’s interest rate liberalisation and further capital-market development foresee continuing migration from traditional term deposits into WMPs. [12]

3. Pensions time bomb

Singapore, Hong Kong, South Korea, Thailand and China are seeing their populations ageing fastest. China’s working age population is beginning to decline.

スクリーンショット 2016-08-30 18.24.33

  • Pension funds’ total assets are likely to increase materially as China’s population ages and the pension system expands its coverage.



1. mutual fund products have yet to be widely accepted by investors as savings vehicles beyond the high net worth clients / In China, professionally managed assets such as pensions and life assurance recently made up only 10% of household assets. [3]

2. the region’s sharp financial corrections and regulatory surprises are likely to mean that the path of future growth is far from smooth.

– Investment education is the key.

There is already an explosion in online fund sales, highlighting the power of digital distribution channels.  [13]


スクリーンショット 2016-08-30 18.50.36スクリーンショット 2016-08-30 18.51.17

– However, its effect on traditional funds are doubted

one could doubt if the case of the boom of MMF can be repeated on other mutual fund product. The reason is that the investors in China may have a improper understanding about the risk of the products they hold.

(WMPs from banks and securities firms have grown significantly, however, there is widely publicized concern that some customers do not understand the risks involved. Regulation introduced may curtail WMPs. )


Changing investor appetites

1.local bias [4] -> foreign market, as

Asian stock markets are very poor proxies for their fast growing economies, so it is not always easy to invest in the growth using local markets.

2.development of infrastructure as an asset class [4.1]



China: Economic growth and AuM

*China’s GDP has surged from RMB 6 TN in 1995 to RMB 60 TN in 2013.
*China’s asset management industry has also grown rapidly from RMB 0.5 TN in 2005 to RMB 4 TN in 2013. (9 TN in 2015).
*But only 3% of China’s RMB 145 TN financial assets are held in mutual funds.

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Liberalisation also has flip side

+++  Market liberalization has opened the scene to many new players
(e.g. new FMCs affiliated with banks, securities firms, trust companies and insurance firms)

— However, liberalization has not been entirely conducive, many players have focused on “grabbing policy resources” for developing regulatory-driven products, knowing that there may be limited time for such opportunities lapse. (e.g. Security companies, FMC’s subsidies)

The real problem behind is:
continuing dominance of bank financing over equity financing

スクリーンショット 2016-09-01 13.25.16.png


Traditional FMC is daunting

1.Volatile and disappointing market

Chinese stock markets are very poor proxies for its fast growing economies

As of year-end 2013, more than a third of China’s 90 fund management companies were loss-making, with most fund products below RMB 50M statutory minimum AuM.

スクリーンショット 2016-08-31 18.17.11

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In 2007, total AUM for mutual funds reached RMB 3 trillion, and most were stock funds. After that, the AUM declined to RMB 2 trillion, and then recovered back to RMB 3 trillion after six years.

2. Banks control the channel

Several of the fastest growing FMCs are affiliated to major banks.
– Given the retail orientation of the current market, these bank-affiliated FMCs have benefited from access to their parents’ distribution channels.

And FMCs face internal competition from deposits, bank-trust wealth management products (WMPs) and insurance products, which seems provide high and safe return .

A competition between deposit, WMPs and AuMスクリーンショット 2016-09-01 14.12.34

3. QDII has had a difficult start.

4. Investors have extremely limited loyalty for any given firm or product.


スクリーンショット 2016-08-31 19.32.50

3 key drivers for dramatic growth in China

1.the emergence of institutional investors given
i) relaxation of investment constraints,
ii) tax incentives,
iii) aging population hunting for higher yield.

2. household’s evolution from saving to investing
(Chinese households tend to keep their saving in low yielding bank deposits. Of RMB 45 TN in household savings, mutual fund penetration is only 7% (2013))

But it is important to ask

Do households concerned about the threat of inflation eroding savings?
Is lack of alternative investment opportunities the reason of Majority of savings in bank deposits ?
Do that means development of the fixed income and multi-asset funds?

3. RMB internationalization as full convertibility should significantly increase both outward and inward investment

(Foreign investor can currently 2013 access Chinese markets only through the QFII, RQFII and the Qualified Foreign Limited Partner(QFLP) programs. When the market is eventually opened for foreign investors, removing all constraints on liquidity and repatriation, this should trigger changes on global benchmark weights and significant new inflows over time)





Favorable macroeconomics for asset management in China

While the media focus on China’s economic slowdown and market volatility, international asset managers should keep their sights on the China market. In fact, asset-management opportunities in China continue to grow, nurtured by strong long-term economic fundamentals, increasing sophistication and deregulation, as well as positive cross-border trends.

A. a rate of 6.9% is still very healthy, related to its international peers and its base

B. with income per capita increasing by 34% over the last five years, the number of households with income above USD 30,000 doubled. The same is true for the number of high-net-worth individuals (HNWIs). [5]  + lowering deposit rate and WMP’s return
-> Slowly undergoing a shift from saving to investing, Chinese people are looking for new investment opportunities.

スクリーンショット 2016-09-02 12.09.38.png

C. Faced with historically low yields in the savings market (currently 1.5% for a one-year deposit), many Chinese investors are willing to shift their portfolio toward riskier asset classes such as stocks, while recent market volatility has highlighted the need for diversification.

スクリーンショット 2016-09-02 12.12.00.png

D. the structural aging of the Chinese population is also impacting the asset management market positively


Ongoing deregulation
-> provides foreign companies with increasingly favorable market-entry opportunities in China

Over the past two years, Chinese regulators have unveiled significant liberalization measures:

  1. addressed concerns over capital markets accessibility to encourage capital inflows and offset the drop in foreign exchange reserves
  2. renminbi convertibility

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Areas with growth potential

1) Domestic market

1a) Product innovation

i.Money market funds: a China-specific trend

スクリーンショット 2016-09-02 13.48.03.png

ii. Alternatives and fixed-income funds: potential rising stars to come

demand for sophisticated strategies is expected to increase. Asset classes such as quantitative products, private debt, hedge funds and private equity are still of limited supply domestically but are highly sought after by HNWIs, Ultra High Net Worth Individuals (UHNWIs) and institutional investors.

Overall, product innovation keeps increasing in China, nurtured by deregulation and market fluctuations [6]. In this context, alternatives and fixed-income products appear much more appealing than in the past, especially for the more sophisticated institutional clientele

1b) Client mix dynamics

i. Massive growth of pension funds [7]

ii. Insurance mandates

2) Cross-border market

2a) Demand for offshore investments from Chinese investors [8]

2b) Demand for investments in Chinese assets from global investors [9]

Fundamentally, in the coming decade, the “greater-China” region will no longer be seen as a source of exposure to emerging markets, but rather as a distinct asset class, with Chinese A-share investments making up a significant part of this allocation.



1) Evolving legal entity status requirements put foreign asset managers in front of strategic choices on current vs. future local setup [10]

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2) The distribution conundrum [11]



In the past five years or so, Asia’s (ex Japan and Australia) growth has been second only to Latin America’s, but investment fund assets remain a small proportion of the global total


The IMF World Economic Outlook, January 2016, forecasts 2017 GDP growth of 2.1% for advanced economies, versus 6.0% for China, 7.5% for India and 5.1% for ASEAN.


The Mutual Recognition of Funds between Hong Kong and China, launched in July 2015,is a form of liberalisation, has started slowly but shows great promise. The scheme gives Hong Kong-based asset managers approved under it access to Chinese investors. Similarly, it allows Hong Kong investors to buy Chinese funds directly, and initially this ‘southbound’ route has proved the fastest growing. At the end of 2015, a batch of seven funds was approved under the scheme.Over time, it’s likely that a large number of Hong Kong-domiciled funds will be sold into China. Equally, Chinese asset managers will also market into Hong Kong.


In Singapore, professionally managed assets such as pensions and life assurance recently made up almost 50% of household assets.12 This level is broadly equivalent to the US. In Malaysia, they’re close to 60%.


While it used to be thought that Asian investing had a local bias.
Historically, Asia’s investors have been credited with two characteristics – a trading mentality and an appetite for income. The former explains the preference for structured products that reduce uncertainty by fixing the maximum loss. The latter supports the popularity of income funds, especially given the need to save for retirement and education in countries with underdeveloped pension systems. But shifting market conditions are influencing demand. In 2015, diversified multi-income funds sold well. Since the China-driven market volatility in early 2016, liquid alternative funds have been in demand due to their absolute return qualities. Financial deepening in countries such as China, with its newly open bond markets will make manufacturing these products locally easier.


The single biggest change in the next 10 years could be development of infrastructure as an asset class. China alone plans to invest up to US$1tn in its ‘One Belt, One Road’ scheme to construct ports, roads, railways and pipelines stretching across Asia, west Africa, the Middle East and into Africa. With AIIB’s support, the result would be a sizeable new set of Asian assets for asset managers to invest in.


Capgemini’s World Wealth Report 2015 published estimates that China is home to 890,100 HNWIs, or one HNWI per 1,000 citizens (by comparison, India’s ratio is 0.2/1,000 and the US’s 14/1,000)


Equity market downturn since June, 2015, retail and institutional investors have quickly come to understand the need for more balanced investment portfolios, causing them to seek greater diversification in the domestic market. Therefore, demand for non-equity, high-yield products is on the rise.


China’s pension system is still at a nascent stage of development. Funds from the National Social Security Fund (NSSF) and Enterprise Annuity Funds (EAP), however, have seen significant growth: from 2013 to 2014, EAP’s AuM increased by 50%, driven by retirement saving needs. Among all institutional investors, pension funds appear to be an attractive client segment to serve.

In 2015, China set up an occupational pension scheme (OA) for government employees – a type of supplementary pension similar to the 401k in the US that includes payments by both government departments and employees. It is estimated that this new scheme will add RMB 150 billion (USD 24.12 billion) annually into the pension industry from 2015 to 2020.

Given the level of uncertainty in Chinese financial markets today, the government’s pension funds are increasingly willing to outsource management to professional fund managers. We estimate the outsourcing ratio to be 25% for the NSSF and 95% for EA.


According to the P2P (peer-to-peer) lending platform CreditEase, in the past four years the proportion of mainland HNWIs’ holdings of foreign assets has doubled from 20% to 40%, and that of UHNWIs has risen from 50% to 60%, sparking the growing demand for offshore investments.


Despite China’s volatile equity market, several players have recently sought out higher quotas. For example, Vanguard, Wellington Management and Hyundai Investments have gathered RMB 20 billion (USD 3 billion), RMB 2.5 billion (USD 0.4 billion) and RMB 3 billion (USD 0.5 billion), respectively, during the first two months of 2016. Indeed, the main function of the quota will be to add A-share exposure to its emerging-market funds.


With 45 of the 101 FMCs in China existing as Sino-foreign joint ventures (JVs), setting up a JV with local Chinese partners has long been the status quo for foreign asset managers seeking to access the Chinese market. However, with Aberdeen and Fidelity launching Wholly Foreign-Owned Enterprises (WFOEs) in China in 2015, incumbent foreign players have started to take some interesting new paths. Russell Investments, for example, disposed of its stake in its JV, preferring a shift toward a standalone WFOE model while Franklin Templeton has voiced its intention to set up a new WFOE in addition to its existing local JV


Online distribution of funds is often seen as the solution to the challenges of fund distribution in China. Recent events, such as the rise of online fund supermarkets in other Asian markets, tend to suggest that the near-term potential for online distribution is far greater than previously assumed. Online distribution of funds can be divided into two categories: the online platforms of fund companies and online distribution over third-party platforms, which comprises 101 registered players in China in March, 2016.


Commercial banks’ WMP offerings – pooled savings products that offer a higher yield than deposits – have grown exponentially in recent years.Outstanding WMPs rose at a compound annual growth rate of 55% from 2009-14, reaching CNY 23tn as of end-2015.


More than half of funds in China are now sold online, according to Z-ben’s estimates, up from just 5% in 2012. But these are almost entirely money market funds such as the popular Yu’e Bao fund, which are sold through platforms such as Alibaba and WeChat. Investors treat them as cash accounts and only invest for short periods of time. The growing popularity of China’s WMPs, which are longer term investments, suggests that savers can graduate to buying longer term investments online.

The diverging US Housing Industry


Conditions Are Ripe for a Big-City Exodus

So What If New York Is Unaffordable? That Helps the U.S.

Rich City, Poor City: How Housing Supply Drives Regional Economic Inequality




In late 1990s, despite dotcom bubble that eventually crashed back to earth, from a money flows standpoint, the bigger imbalance was that high valuations of large-cap stocks relative to small-cap stocks

The U.S. housing market is similarly positioned today as it is growing more unequal.



The pack of most expensive markets is diverging from the rest.
– The priciest metros were 144% more expensive than the least expensive metros in 1986 but that differential has grown to over 319%.


– What’s more, expensive markets almost always had bigger price gains -> the housing rich are getting richer while the housing poor are getting poorer.


The economic fortunes of homeowners who bought in the 1980’s have been tied closely to the random fortunes of U.S. geography [1]. But long lived the West Coast, Northeast, greater Washington, D.C., and Denver.

Even Techies Can’t Afford San Francisco Anymore


The 30-year change in home value across the largest 100 metros is strongly correlated with

1. income growth


2. the amount of housing construction relative to demand


supply elasticity is strongly correlated with house price appreciation
– a lack of housing construction in many metros induced home price appreciation. [3]


A.  Just buy homes in the most expensive metros !!!

B. Since the priciest metros continue to diverge from others, these geographic disparities are sure to persist into the near future. [2]



But there are also good things:

 a wealth transfer from the most desirable communities to the upwardly mobile ones
– The tens of thousands of people who leave New York and California every year act as sources of new demand in the places to which they move, like Florida, Texas and Colorado, where job migration is the driving force of the economy


— Some economists argue that this migration from high-cost to low-cost cities acts as a drag on productivity and national output, because less dense cities are less productive than more dense cities.

+++ 1 This theory is running up against a new reality, however. If you think of wages as a proxy for productivity, the numbers back this up: San Francisco tech workers have less and less of a salary advantage over tech workers in other cities.

+++ 2 Even if the productivity argument holds, there are economic equality and civil rights benefits to migration from coastal metros to less-developed ones. [3]

Therefore, Density limits in leading cities fuel the economies of rising cities like Atlanta  
– > thus decrease economic inequality between metro areas and lead to economic interdependence that drives civil rights




Valuations converging of large-cap stock and small-cap stocks will be replicated in the housing market. Reason:

1. There’s a limit to everything. Substitution dynamics — consumers weighing the value of various goods — applies to housing just as much as it does to food.

2. internet will lead people and jobs leave primary metro areas for secondary ones [4]




There is wide regional variation in the amount of wealth generated from homeownership. Homeowners’ return on investment in Rochester, N.Y., and Wichita, Kans., have been +85% and +89.9%, respectively, while the return in San Francisco and San Jose has been +557.6% and +496.5%


These findings are meaningful, since wealth is often passed down to future generations, who in turn might use such inheritance to also purchase homes, which continues the cycle of wealth accumulation. See Family Tradition: Kids Are More Likely to Own a Home If Their Parents Did


スクリーンショット 2016-09-03 19.32.01スクリーンショット 2016-09-03 19.32.11スクリーンショット 2016-09-03 19.32.23

Despite a need for more housing, and despite the labor shortage and the wage growth, construction industry employment fell 6,000 in April and 16,000 in May and showed no growth in June. This is the first time in more than five years that construction employment has shown no growth for three months.

While the signals from the economic data are very strong, the market signals have been more muted. What’s clear is that 2-3 percent construction wage growth and 5-6 percent house price appreciation isn’t anywhere close to creating strong enough price signals to encourage the market to build all the housing we’re going to need over the next decade.


Job convergence between metros “spreads the wealth,” ensuring that tech workers in Raleigh and Atlanta and manufacturing workers in South Carolina and Alabama have access to good jobs too.

Over the past 50 years, Southern communities with more-developed business interests have made progress on civil rights before those with less interdependence with the national economy.One of the reasons Atlanta made more progress on civil rights in the 1960s than Birmingham was the local business community was afraid of losing access to Northern capital.Similarly, when “religious freedom” bills and other measures seen as anti-gay arose in Indiana, North Carolina and Georgia, national business interests like Apple and Pfizer (not to mention Nascar) pressured politicians to stand by gay rights. Donald Trump’s shrinking electoral map is in part due to the spread of well-educated professionals to Virginia, Colorado and North Carolina.


The conventional wisdom that the internet would allow people and jobs to leave primary metro areas for secondary ones has run up against the fact that over the past 20 years. BcauseThis at the height of the last housing boom the impact of the internet on daily lives was still quite small

Now, with a labor market approaching full employment and the housing market nearing a normal recovery, it would be fair to evaluate the question of whether people will move.

The latest Case-Shiller home price report shows that Portland and Seattle have the fastest home price growth in the country, benefiting from Bay Area transplants.Additionally, Sun Belt metros such asDallas, Tampa and Miami now have faster home price growth than San Francisco or Los Angeles.

The history of the last transformative technology the automobile, offers another counterargument. The Model T Ford was produced between 1908 and 1927. Yet the Interstate Highway System was not approved by Congress until almost 30 years later, and the Sun Belt boom occurred even after that. The automobile was a revolutionary technology incubated in Detroit, but its biggest beneficiaries were the suburbs in Atlanta, Houston, Dallas and the Southwest.





The largest and the biggest tenbagger


Chart: The Largest Companies by Market Cap Over 15 Years


Google (Alphabet) IPO: 12 Years Later






Crude Oil Pricesスクリーンショット 2016-08-31 22.08.44.png


– To reach more people, Walmart had to build more stores, expand complex supply chains, and hire new employees, which takes a lot of capital and manpower, and the stakes are high for each new expansion.

+ Amazon on the other hand, can bring in more revenues with less of the work or risk involved. Scale allows tech companies to get bigger without getting bogged down by many of the problems that companies with millions of employees can run into.

(I guess here it means that in a technological world, a big firm will not produce large management cost, supervision cost or even institutional inertia like traditional business giants do)

The world’s best tech companies are also able to gain competitive advantages that are extremely difficult to supplant.

(I might agree that engineers and computer science competency are their core competitive advantages, if not the cheap money and high valuation)


スクリーンショット 2016-08-31 23.17.54.png

成立于2002年的Monster Beverage是美国第二大功能性饮料生产商,仅次于红牛。

创始人南非商人Rodney Sacks。一个在欧洲做过多年律师的南非人。他移民美国后,一直在寻找好的投资机会。1992年和朋友用1460万美元收购了Monster Beverage的前身汉森公司。当时的汉森以生产天然苏打水和果味饮料,只有12名员工,年销售额有1700万美元。在欧洲的经历,让Sacks发现功能性饮料已经迅速崛起了,而此时的美国依然以可口可乐这种碳酸饮料为主。但人们开始关注一些新的饮料类型。


Monster Beverage定位18到30岁的年轻人,这些人是最大的美国功能性饮料消费者。


  1. 品牌定位更强悍
  2. 安呢基是红牛的五倍
  3. 性价比也更高
  4. 宣传渠道上,更加精准。
    红牛以大规模电视广告为后台,而Monster Beverage从极限运动入手,切中更细分的目标用户。

(Red Bull commanding approximately 42% of market share and Monster at around a 39% market share.)


从定价权看,Monster Beverage的净利率能够做到15%。可口可乐和百事可乐的净利率才12%左右,康师傅方便面净利率只有3%。定价权背后是产品的品牌,消费者认可度,护城河。

(数字有问题,coca cola的净利率并不低,最近几年MNST的收入成长也并不算快,虽然盈利性有提高。关键应该还是行业的增长,以及竞争不大。前有可乐后有功能性饮料,为何饮料的护城河如此之强,值得再研究下)

スクリーンショット 2016-08-31 23.42.48スクリーンショット 2016-08-31 23.37.20


How to Create a Millennials Positioning Strategy for a New Energy Drink Brand

Japan’s Government are Losing Revenues


Kuroda Money-Go-Round Undercuts Japan Negative-Rate Windfall

BOJ’s Eventual Stimulus Exit Could Eat Up Reserve in Five Months

BOJ Bond Valuation Losses Are Said to Be $8 Billion in 2015


2016/09/09 update



Japan’s government is not profiting from negative yields!

1.The BOJ buys debt from the market
-> pushes prices up and yields down
-> gives extra money to the MOF.


2. The Finance Ministry pays interest income to the BOJ for the bonds it now holds
-> although rates is low (10-year notes currently at 0.1 percent)
-> the amount is huge (BOJ owns almost 327 trillion yen in sovereign debt)
-> interest income in 2015: 1.29 trillion yen


3. The BOJ then uses some of its income to pay for the valuation losses on owned bonds
<- Because BOJ buys debt for more than the face value, and has to write it down [1]
-> BOJ wrote down the value of JGB holding by 874 billion yen in 2015, 40% of the interest income


-> Obviously, if the amortization losses from the BOJ’s bond buying operations become too large, income could go less, even negative

-> The BOJ will buy 120 trillion yen worth of bonds this year(80 QE+40 Redemptions) [4]
-> if it buys 100 yen bonds at 103 yen, that would mean a total loss of 3.6 trillion yen
-> if we assume the average period is 10 year, that would mean 0.36 trillion loss increased per year !  [2]
-> BOJ’s last year coupon income is about 1.3 trillion, it will take only 4 years to make it negative under recent price level.
-> And don’t forget with prices high and coupons low, more and more of the debt on its books will have a negligible income and a high price that needs to be written down.

1x-119スクリーンショット 2016-08-28 19.30.22

-> Therefore BOJ could go bankruptcy if bond purchasing continues! [3] 
# but of course BOJ can prolong the duration of its holdings

4. BOJ then returns much of its leftover profits to the MOF as dividend.


5. BOJ has to cut dividend so that it could back up its reserve 

-> In 2015, the BOJ cut 450 billion yen from its dividend to the government so it could increase its reserve to cover potential losses on bond holdings. [6]
-> According to Bloomberg, Japanese Government benefited 110 billion yen extra money from NIRP [5]
-> The government’s revenue actually decreased under massive stimulus!!

6. Things might be going to worse

The BOJ has approximately 2.7 trillion yen in provisions for potential bond losses after setting aside 450 billion yen in 2015, given its financial statement 

If the BOJ tapers stimulus, it will face potential losses on

  1. bond holdings
  2. higher interest payments on lenders’ reserves

Policy maker Takahide Kiuchi estimated the central bank could face losses of 7 trillion yen per year during a taper of its stimulus.1x-122

“When people realize the limits to the BOJ’s finances, it could possibly create a massive shock”
“The bank has about 7 trillion yen in capital, but that would be eaten up quickly.”

7. Conclusions

A. If BOJ continues its recent project, both the government and BOJ will lose money and go bankruptcy

B. If BOJ suddenly exits from its unprecedented easing policy, existing reserves will be insufficient and it will go bankruptcy

C. The BOJ have to exit, or do helicopter money. But it will definitely avoid selling its bond holdings, and “instead will probably try to maintain its balance sheet by raising the deposit rate”



So that the book value eventually equals the principal. The basic point is that as BOJ committed to hold these bonds until maturity, it doesn’t value the bonds at market price but takes the markdown gradually so that at maturity the book value equals the principal.

More specifically, for the most recent 10-year note, the MOF initially auctioned it for 101.96 yen and the BOJ probably paid more than that. It will now have to take a 2 yen or more loss on each of the bonds in that series it owns, so that when it matures in 2026, the price on its balance sheet will be back at 100 yen. The benchmark bond price was 101.779 yen, with a yield of minus 0.08 percent


In its purchase operations on June 10, the BOJ bought 416 billion yen worth of the No. 342 10-year bond, at an average price of about 102.65 yen.

The BOJ will earn 416 million yen income annually from the 0.1 percent coupon on these bonds, and will have to write down 1.1 billion yen each year to account for the 2.65 yen by which the purchase price exceeded the principal.

And don’t forget BOJ’s purchases often occur at a slight premium to the current market price.



“The BOJ couldn’t go bankrupt in the way a private bank could”

“One could make an economic case that the balance sheet of the central bank should be of marginal relevance at best to the determination of monetary policy,” Bernanke said in the speech, made years before he enacted unprecedented stimulus as Fed chair. “There are many essentially cost-less ways to fix” it, including assistance from the Ministry of Finance, he said.




Japan’s Ministry of Finance made about 110 billion yen ($1.1 billion) more in the year to April than it would have if yields had been zero


The central bank is holding on to as much as half of the profits from the interest received on its bond holdings, after an accounting rule change in November.

Why Fundamental Analysis Works?


The Fundamental Reason Buffett Beats the Market

The Fundamental Attribution Error, or Why Predicting Behavior is So Hard

The Market Outsmarts Everyone



Noah Smith 在讨论最近Farma和Thaler的有效市场之争的时候介绍了一篇14年的新论文。两个学者用了14个常用的BS项和14个IS项去和市值跑回归然后用residual来确定高估低估然后建立portfolio。结果是4-9%的超额收益。事实上这都不能被称为Fundamental analysis,因为与其说是基本面判断,这只是证明了市场价格都是错误定价的,并且mispricing arising from convergence to fair value。




所以这是我个人认为的为什么Fundamental Analysis能成功的原因。其实并不只是基本面分析或者哪一类的投资方式。关键是掌握了具有稳定度的东西。精通财务报表的背后是对经营者和公司模式的认知。这部分可以具有相当的稳定度。而反观技术投资这样的模式是绝对没有任何长期利益的,因为他本身建立在了收到无穷多的影响的脆弱的无数的投资者行为上。


至于Noah Smith 最后说 “Of course, the EMH may get the last laugh, in a way. As often happens, money managers will read this paper and write code to do more sophisticated versions of what the professors did. They will trade on the mispricing, and it will mostly vanish, allowing proponents of efficient markets theory to declare victory.” 我是不这么认为的。从人的行为的稳定上来看的话。

基本面分析的成功来自两件事,市场先无视价值,然后市场又正视价值了(或者是摆向了另一种情感极端)。[1] 这并不会有太多改变。市场参与者无视价值是因为不稳定,收到外界影响,内在影响,固有观念。哪怕明知在统计学上毫无道理,但是我们还是会下意识用外表着装来判断一个理财师的专业度。短期的市场决策收到太多毫无稳定性的力的影响。另辟蹊径的对冲基金的alternative策略可能会逐渐失去有效性。但是无视商业稳定性的价格偏移会一直存在。



Fundamental analysis succeeds if two things are true. First, the market has to have overlooked important things about a company’s value — things that can be observed by carefully scrutinizing publicly available information. Second, the market has to eventually realize the company’s true value.

Economists have become Data Scientist


How Economics Went From Theory to Data

Data Geeks Are Taking Over Economics

Most of What You Learned in Econ 101 Is Wrong


Theory’s dominance peaked in 19831x-114

From 1960s to 1980s, the majority of the articles published in the field’s most influential journals [1], were works of theory.


Reasons for the shift:

  1. personal computers became commonplace
    crunching data became much easier, which impulsed the biggest shift toward empirical work which benefits from a huge stock of untested theories
  2. the subsequent rise of the Internet and digitization
    a huge new array of data to crunch
  3. the grand models — particularly the macroeconomic ones — didn’t explain the world very well
    Economic theory may have become so abstruse even for editors


Session title from nowadays: “Data Gold! Exploiting the Rich Research Potential of Lifetime Administrative Earnings Data Linked to the Census Bureau’s Household SIPP Survey.” / Or study linked data from the European Patent Office, the Finnish statistical agency and the Finnish military to research “whether people with high IQs invented more things and made more money than others”


The data can’t tell us everything

  • Economics in the U.S. had an earlier empirical heyday in the 1920s and 1930, but flummoxed by the Great Depression.


Econ 101 theories are found wrong now,

as the core of economics theory is based on individual optimization.

For example:


In the last two decades, empirical economists have looked at a large number of minimum wage hikes, and concluded that in most cases, the immediate effect on employment is very small.In reality, employment probably depends on a lot more than just today’s wage level.[2]


Recent empirical studies have shown that rather than negative effect, occasionally, welfare programs even make people work more. [3]

  1. For professional theorists, empirical failures simply mean more work to do.
    Many labor economists are now working on complex theories that model the process of employees looking for work and employers looking for people to hire.
  2. But for Econ 101 classes, leaving economic majors thinking that the theories they learned are mostly correct isn’t good.



(As I once discussed, complicated model along with mathematical skill won’t make economics more convincible as they are not working on solid objects from which one can grab some basic laws)


A new way of empirical economics

Instead of a complicated model about optimization and utility functions to compare model to data (structural estimation),

  • a so-called natural experiment [4] just look for a case where some kind of random change in the economy
    E.g. you could study a random influx of refugees to answer the question of how immigration affects local labor markets. You don’t need a complicated theory of how workers and companies behave — all you need is a simple linear model of how X affects Y.


(It increased, but is still minority. Contrary to Noah Smith’s expectation, I doubt the future of this method as economists need sophisticated math to appeal their value. And  this method is actually close to the way of economic historian, whom have been long contempt by the mainstreams.)



American Economic Review, Journal of Political Economy and Quarterly Review of Economics


Theory tells us that minimum wage policies should have a harmful impact on employment.Basic supply and demand analysis says that in a free market, wages adjust so that everyone who wants a job has a job. If you set a price floor, a bunch of low-wage workers would be put out of a job as their productivity is lower than that price floor.

The problem is that employment also depends on predictions of future wages, on long-standing employment relationships and on a host of other things too complicated to fit into the tidy little world of Econ 101.


Theory assumes welfare gives people an incentive not to work. If you subsidize leisure, simple theory says you will get more of it.


This approach are promoted by economists Joshua Angrist and Jörn-Steffen Pischke. Also called quasi-experimental methods — the “credibility revolution.” And their book about the subject is titled “Mostly Harmless Econometrics.”