Q: Why would KraneShares focus on Chinese market rather than other emerging markets?
China dominates the MSCI Emerging Markets Index with a weight of 40%. Numerically Chinese companies represent 704 of the 1,404 stocks within the index compared to South Korea, the second largest country, has just 110 stocks. China’s weight is apt to grow to more than 50% or even 60% due to the inclusion of Chinese A-shares once three outstanding issues are addressed. As China’s weight grows in benchmarks, global investors need a partner to navigate China’s economy and capital markets. KraneShares hopes to earn investors’ trust by providing a balanced perspective due to our singular focus on China.
Q：What are the three outstanding issues?
· MSCI China A futures – MSCI and HKeX recently announced 37 MSCI indices will have futures listed on the HKeX. China A was not among the 37 though it is believe China A will be the 38th though timing is unknown.
· T+0 – Mainland China and Connect trades settle on the day of the trade while trade day plus two is the global standard. This is problematic as funding a China A trade requires funding from a T+2 market. This is a problem for passive investors.
· Alignment of HK and mainland holiday schedules
Q：In 2019, you published an article named 'Uncommon yields: How China is a rare bright spot in a world deprived of yield.' Do you still hold the view now？
Globally central banks have lowered interest rates to exceedingly low levels. China’s bond market offers attractive yields on a relative and absolute basis. Additionally the renminbi has been exceedingly stable relative to other countries’ currency. This rare combination of yields and low currency volatility make Chinese bonds an attractive investment for global investors.
Q: What do you think of the warning sent by SEC that investors should be careful about investing US listed Chinese companies?
All stock investing involves risk. The PCAOB’s inability to receive the audit papers of US listed Chinese companies wouldn’t diminish this risk as Ernest & Young discovered the Luckin Coffee fraud during the annual audit. The PCAOB has lingered for far to long as it is a global standard. While the risks are evident, the rewards are often understated. Would you believe that NetEase has outperformed Amazon since its IPO? The performance of many US listed Chinese companies are equally impressive while the companies themselves are among the most innovative globally.
Q：Recently, there are rumors indicating that some US listed Chinese companies would take addition quote on the HK Stock Exchange. And several companies already do that, like Alibaba, Netease, JDcom. What do you think of this phenomenon ? Is this a proper time to do this?
Alibaba’s revenue has doubled over the last three years but has the stock doubled? It hasn’t because the US listed Chinese companies aren’t trading on their fundamentals but on US China trade news. Alibaba’s decision to relist in Hong Kong will allow for the stock to be properly valued. The US stock will benefit from this rerating due to the fungibility between the US and HK stocks ie one can convert from the US stock to the HK stock and vice versa.
Q：Many people are worried about that Coronavirus may promote anti-globalization. Is it possible from your perspective? And if it does happen, what would China do?
The trade war proved we are a global economy. The coronavirus has proven we are a global community. Decoupling, protectionism and isolationism would have an adverse effect on the global economy as we navigate a fragile post quarantine recovery. Ultimately we need more communication not less between the largest and second largest economies.
Q: For several years, part of experts have been considering that 'Will ETF proliferation destroy the world?' What do you think of this question?
ETFs have many positive attributes which explains the rapid adoption and asset growth over the last two decades. While the vast majority of ETFs provide broad exposure to stocks, there are ETFs that employ more complex strategies. Investors need to do their due diligence before buying any investment product.
Q：How would you define 'Great company'? Do you have any standards?
We invest in many great Chinese companies listed on domestic and foreign exchanges. These companies share similar traits to their global counterparts such as a CEO who founded the company. Corporate culture always flows from the top which makes understanding a company’s leadership critical. Companies at the forefront of a significant trend in behavior can allow them to execute a strategy resulting in rapid growth. Implementation is as critical as opportunity which is why investors place a premium on strong management.
Q：Any advices for Chinese investors?
Diversification is an often overlooked positive investor attribute. Unless you can predict the future “going all in” on an investment idea can result in catastrophic results. Cutting losses can be just as important as finding winning investments. Having a game plan and strategy allows one to eliminate emotions when results are positive or negative.