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The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This

commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing

communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor

should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the

independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures

displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast,

projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability

for any failure to meet such forecast, projection or target.

December 2019

Demystifying China: myths and realities

China in charts

1

Introduction

As China’s investment landscape is large, complex and still evolving, there are understandably many

misconceptions about this market. This is partly because China’s capital markets have largely been closed off to

foreign investors in the past. But some of these misconceptions also find their roots in outdated views and

oversimplifications. In this publication, we attempt to debunk some of these popular “myths” and unveil the

“realities” through simple yet insightful charts covering various topical and long-term themes.

China’s macroeconomic fundamentals remain robust. After a sharp slowdown over the past two years,

China’s economy now displays signs of stability thanks to resilient domestic consumption and policymakers’

proactive stimulus measures, including increasing infrastructure spending, higher issuance of local government

special bonds, and cuts in value-added tax and individual income tax

China’s transitioning economic model fosters higher quality economic growth. Demographic trends

such as urbanisation and increasing income levels have led to stronger and more sustainable consumption in

the economy and greater demand for higher-end goods and services. At the same time, Chinese policymakers

have also made commitments to control pollution and develop its electric vehicle (EV) infrastructure

China’s onshore asset markets are more accessible and present attractive investment opportunities.

Despite headlines on the pickup in default rates in China’s bond markets, defaults remain a tiny fraction of the

overall onshore credit market. Even after a strong rally onshore equity markets also offer ample investment

opportunities for bottom-up stock pickers

China has established itself as an innovation powerhouse. Supported by government spending, private

investment and a growing educated workforce in higher-tech fields, China is now home to more ‘unicorns’ than

the US and nearly half of the world’s 20 largest internet technology companies

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such

forecasts, projections or targets. For illustrative purposes only.

2

0

2,000

4,000

6,000

8,000

10,000

12,000

2017 2018 2019 Q1-3

Macroeconomic fundamentals remain robust

Source:

1. Bloomberg analysis of International Monetary Fund data, as of Oct 2019

2. Bloomberg, as of Sept 2019

3. US Bureau of Economic Analysis, Bloomberg, CEIC, HSBC Global Asset Management, as of Oct 2019

4. National Bureau of Statistics, as of Sept 2019



Myth: With a slowdown in its economy, China is no

longer the world’s growth engine.

Reality: China still accounts for one-third of the world’s

economic growth. Its contribution to global growth

remains far greater than any other developed or

developing country.

China (33%)

US (14%)

India (14%)

Rest of the World (40%)

Myth: China is not doing enough to support slowing

growth.

Reality: In addition to cutting taxes and rolling out

various other fiscal and monetary support measures,

China approved more infrastructure investment in the

first three quarters of 2019 than in all of 2018.

Myth: China and US are decoupling amidst escalated

trade tensions.

Reality: Given the interconnectedness between the two

economies through trade, investments, financial flows

and other links, we believe both sides would have

strong incentive to resolve the trade dispute.

Myth: Inflation is a rising concern.

Reality: Pick-up in headline inflation is predominantly

driven by food inflation amidst swine fever. Core

inflation remains stable.

Contribution to 2019 world GDP growth (forecast) China’s approval amount of infrastructure investment

(CNY 100m)

US-China FDI & sales by US foreign affiliates in China China’s CPI measures (%)

0

5

10

15

Feb-18 Jun-18 Oct-18 Feb-19 Jun-19

Core CPI (excluding food and energy) YoY

Food CPI YoY

Headline CPI YoY

0

100

200

300

400

500

600

0

20

40

60

80

100

120

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

USD bnUSD bn

US FDI in China (LHS)

China FDI in the US (UBO) (LHS)

US total sales in China (all affiliates) (RHS)

3

One market, many opportunities

Source:

1. Bloomberg, as of Sept 2019

2. Wind, HSBC Global Asset Management, as of 25 Oct 2019

3. MSCI as of Oct 2019



0

5

10

15

20

25

30

Fin

ancia

ls

Consum

er

Dis

cre

tio

nary

Com

munic

atio

nS

erv

ices

Industr

ials

Consum

er

Sta

ple

s

Info

rma

tio

nT

echnolo

gy

Mate

rials

Health C

are

Real E

sta

te

En

erg

y

Utilit

ies

HK-listed China A US-listed

Structural growth areas are mostly

listed in onshore China

Myth: Currency exposure to RMB is very risky.

Reality: RMB exhibits lower volatility than select major developed market currencies.

Myth: Pickup in bond defaults poses systemic risks in

China.

Reality: Defaults remain a tiny fraction of the overall

onshore credit market. Moreover, the government has

put an adequate number of favourable policies in place

to cushion against any potential contagion.

Myth: Investing in offshore Chinese equities eliminates

the need for onshore investments.

Reality: Some highly compelling investment

opportunities remain exclusively onshore, so investors

stand to benefit from the increased access in recent

years

CNY exchange rates against major DM currencies (rebased at 100)

Defaults remain manageable Sector breakdown of MSCI All China Index

60

70

80

90

100

110

120

130

140

Jan-2016 Jan-2017 Jan-2018 Jan-2019

USDCNY EURCNY GBPCNY JPYCNY

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0

20

40

60

80

100

120

140

2016 2017 2018 2019(ann.)

2019YTD

Size (CNY bn) (LHS) % Credit market (RHS)

4

High-end consumption, low-emission cars

Source:

1. Bain Luxury Goods Worldwide Market Study, Spring 2019. Forecast growth rate ± 1%. Growth at constant exchange rates.

2. Bloomberg, as of Sept 2019. Income measured by pre tax gross income.

3. Bloomberg NEF Electric Vehicle Outlook 2019

4. Bloomberg NEF, China Electric Vehicle Charging Infrastructure Promotion Alliance, as of Oct 2019



-5

0

5

10

15

20

MainlandChina

Asia ex.MainlandChina and

Japan

Americas Japan Europe Rest ofthe World

0

20

40

60

80

100

2009 2014 2019 Q3

RMB 1 - 68,300 RMB 63,300 - 158,000

RMB 158,000+

0

200

400

600

800

1000

2015 2016 2017 2018 2019

China US Germany0 100 200 300 400 500

Japan

Germany

France

Netherlands

US

China

Myth: Chinese consumers are cutting back on their spending amidst growth concerns.

Reality: China’s consumer spending is increasingly driven by purchases of high-end consumption goods by the

growing middle class.

Myth: China’s growth is always at the expense of environmental degradation.

Reality: China’s electric vehicle (EV) sales and charging infrastructure lead the world.

Luxury goods market growth (%)

(2019 forecast)

Annual EV sales (thousand cars)

% Distribution of total households by income

Number of EV charging stations ('000)

5

Innovation more than imitation

Source:

1. World Intellectual Property Organization: World Intellectual Property Indicators 2019

2. National Bureau of Statistics, as of Sept 2019

3. Hurun Research Institute, as of Oct 2019. Unicorns are defined in the research as tech start-ups that are valued over US$1 billion, founded in the 2000s and

not yet listed on a public exchange. Valuations are as of 30 Jun 2019.



0

500

1,000

1,500

China US Japan Rest of theWorld

2017 2018

0

1,000

2,000

3,000

4,000

2014 2015 2016 2017 2018 2019 Q1-3

206 203

2113

7

0

50

100

150

200

250

China US India UK Germany

Rank Name

Valuation

(USDbn) Headquarters

1Ant

Financial150 Hangzhou, China

2 ByteDance 75 Beijing, China

3Didi

Chuxing55 Beijing, China

4 Infor 50New York City,

USA

5 JUUL Labs 48San Francisco,

USA

Myth: China does not prioritise R&D and innovation.

Reality: China owns 46.4% of all patent application filings around the globe and the Chinese government has

made significant increases in its R&D spending.

Myth: China lags behind technology hubs such as Silicon Valley.

Reality: China has surpassed the US as home to more “unicorns” in 2019. There are in fact more unicorns in

Beijing (82) than in San Francisco (55) and New York (25) combined.

Number of patent application filings (‘000)

Number of unicorns

China’s fiscal expenditure on science and technology

(CNYbn)

Three of the largest unicorns globally are from China

6

Our investment view

While we acknowledge China still faces near-term challenges as it deals with geopolitical uncertainties and an

economic slowdown, the outlook for 2020 looks decidedly less pessimistic than 2019. In the absence of substantial

stimulus measures, economic growth in the world’s second-largest economy has held up relatively well, in our

opinion. The latest macro data from China seems to indicate the state of the economy is better than what the

headline numbers suggest and its ability to weather external shocks has improved, supported by vibrant domestic

consumption. The current slowdown reflects a stabilisation in the economy after the hockey stick growth witnessed

in the past two decades, though the downward pressures remain evident. Nonetheless, we see signs of bottoming

out in the economy. At the same time, China has continued to press ahead with key reforms including - opening up

its financial and capital markets, transforming its state-owned enterprises, enabling more urbanisation and fostering

innovation – thus allowing its long-term structural growth story to stay intact.

At HSBC Global Asset Management, we remain focused on fundamentals as we continue to identify attractive

opportunities in both onshore and offshore China. Our disciplined and repeatable investment process has helped

us establish a solid track record over nearly three decades of managing Chinese assets. Given the evolving nature

of China’s markets, we believe Chinese portfolios in particular benefit from our investment process, which puts

emphasis on rigorous fundamental research. Overall, we remain constructive on China’s long-term growth story

and the opportunities on offer as its economy continues to evolve.

In the China equities space, we remain constructive on the consumer sector given the trend of premiumisation

which supports higher pricing power and margin expansion. We are also positive on IT companies as we are

optimistic about 5G development. Related opportunities may be found in the onshore equity markets, home to

a more comprehensive and vast investment universe when compared to the offshore markets. The Shanghai-

and Shenzhen-listed A-share market is home to 50%-80% of companies in sectors that make up China’s “new

economy”, namely healthcare, consumer products and technology

In China fixed income, headlines have focused on the pickup in the onshore default rate. It is important to note

that defaults remain a tiny fraction of the overall market and are more idiosyncratic than systemic. Although it is

not in the government’s interest to allow a systemic default, increased defaults should lead to proper pricing in

credit risk and improve credit differentiation. While foreign investments to onshore bonds have concentrated

notably in sovereign and policy bank bonds, with diligent research and credit selection, we believe certain very

high quality segment of the untapped corporate bond market offers incremental return potential without

significantly increasing credit risk exposure

HSBC Global Asset Management is a pioneer in Chinese investments, with deep experience in investing in both

offshore and onshore Chinese securities. Our large team of 60+ investment professionals located in Hong Kong

and Shanghai help investors understand the changing dynamics within Chinese markets, interpret their implications

in the right way and make appropriate investment decisions

Source: Bloomberg, HSBC Global Asset Management, as of December 2019



7

Accessing China opportunities through our investment capabilities

Source: HSBC Global Asset Management as at 30 October 2019.

Any portfolio characteristics shown herein, including strategy and allocations among others, are for illustrative purposes only. The characteristics may differ by

product, client mandate or market conditions. Information may be changed from time to time without notice.

We offer clients fulfilment options via our fund range or, if preferred, a segregated mandate,

encompassing Chinese equities, fixed income, multi-asset and passive investing.

High-

conviction and

diversified

portfolio

focusing on

stocks with

below

average

valuation for a

given level of

profitability

Focusing

actively on

term

structure,

duration,

sector

allocation,

product

selection and

credit rating

Mixed asset

with income

tilt. Flexible

allocation

across

onshore/

offshore

equities and

bonds within

a risk budget

Passive ETF

tracking the

progressive

inclusion of

China A-

shares into

the MSCI EM

index

Index fund

designed to

offer

investors a

cost-efficient

way to

access

China’s

government

bond market

H-shares

Red chips

A- and B-

shares

Onshore

RMB and

offshore

RMB/non-

RMB

denominated

fixed

income/debt

securities

A/B/H-

shares, red

chips and

ADRs

Onshore/

offshore fixed

income in

RMB and

other

currencies

Stocks

included in

the MSCI

China A-

share

Inclusion

Index

Bonds

included in

the Bloomberg

Barclays

China

Treasury and

Policy Bank

9% Capped

Index

Investment

universe

Key propositions

Key strategies Chinese equityChina fixed

incomeChina multi-asset Passive China-A

Passive China

bond

8

Why HSBC Global Asset Management?

A network of opportunities

Strong track record

managing Chinese

assets since 1992

Significant local

resources and

presence in Hong

Kong China

A robust investment

process built on

solid proprietary

research

A well resourced,

stable and award

winning team

HSBC Global Asset Management is a pioneer in Chinese investments, with deep experience

in investing in both offshore and onshore Chinese securities.

1. Asia-Pacific includes employees and assets of Hang Seng Bank, in which HSBC has a majority holding.

2. HSBC Jintrust Fund Management company is a joint venture between HSBC Global Asset Management and Shanxi Trust Corporation Limited.

Source: HSBC Global Asset Management as at 30 September 2019

HSBC Global Asset Management offices - Countries and territories where our investment teams sit are in bold

Canada

USA

Mexico

Argentina

Bermuda

UK

Sweden

Luxembourg

JerseyFrance

Spain

Switzerland

Malta

Italy

Austria

Germany

Turkey

Saudi

ArabiaUAE

India

Singapore

Hong Kong

Taiwan

Japan

Australia

Mainland

China2

Presence in

26 locations

629investment

professionals

86Americas

364EMEA

179Asia-

pacific1

9

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised

reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general

information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may

be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of

future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a

result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results

could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor

a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed

herein are those of HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate

current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences,

time horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance

contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied

upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down

as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets.

Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely

by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries

with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not

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This document has not been reviewed by the Securities and Futures Commission.

HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed in Hong Kong by

HSBC Global Asset Management (Hong Kong) Limited.

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