Tech Punting With ‘Chinese Characteristics’

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Make the most of 2019.

Here’s why.

This is the last year before the rise of the Asian century becomes official.

By 2020, the economies of Asia will be larger than the rest of the world combined. That will be the first time since the 19th century.

Yep — at least according to data just published in the Financial Times[1].

The usual suspects are obvious: China, India and Japan.

But you might be surprised to know that the Indonesian economy is on track to overtake Russia by 2023.

The Philippines and Vietnam are scooting along at a cracking pace too.

Half the world’s population is Asian. 21 of the 30 largest cities are there.

All of this is part of a long-term structural shift.

We’re seeing some of the effects of this pop up in the financial world in different ways, too…

One is oil trading.

The Wall Street Journal reports[2] that yuan-denominated oil futures launched in Shanghai last year are gaining in volume.

Most of this current activity appears to be domestic. But it has important implications for the future.

For example, it will dilute the ability of the US government to impose sanctions on a country like Iran if it can sell oil to China and settle in the Chinese currency (or gold).

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It can cut the US dollar and US banks out of the equation.

It’s also going to make a lot of sense for more oil trading to head to China.

That’s because it’s the world’s largest importer and consumer. It’s also highly dependent on global trade for its supply. Chinese imports are rising and US net imports are going down.

I just finished the latest annual report on oil (‘Oil 2019’) from the International Energy Agency.

It does make the point that an Asian benchmark contract, like Brent or West Texas Intermediate, is unlikely to emerge anytime soon. China’s currency would need to be fully convertible before that could happen.

But it’s early days yet in the Asian century…

Perhaps more relevant for us right now is the push for a Chinese NASDAQ.

This throws up some direct investment ideas…

A Chinese NASDAQ coming to the world

Late last year, Chinese officials announced plans for a new stock exchange[3] in Shanghai.

This is to help Chinese tech start-ups raise money.

Now here’s something I didn’t know previously. Only profitable companies are currently allowed to list in Shanghai.

That means firms that need cash to grow — a pretty important point when it comes to a stock market — can’t raise capital in the public market.

That is pretty nuts. This new exchange will have less strict listing requirements.

This is similar to how the NASDAQ rose to prominence.

China’s new board is expected to go live in the middle of this year. There are already 17 companies lined up to IPO.

This could seed some exciting opportunities in the coming years.

I cover small caps in my paid advisory. Most of them don’t make profits either. But that doesn’t mean they’re bad investments — as long as the market can see high potential for profits in the future.

Raising capital allows businesses to expand their staff, research and development or business strategy in some way.

This really could turbocharge the investment opportunities from the Chinese mainland.

It’s not clear to me yet whether foreign investors will have access to them. But I’d be surprised if we didn’t.

Chinese stocks are slowly increasing their presence on the global stage. We’ve seen that with the MSCI index this year, with Chinese stocks increasing their allocation in its emerging market index[4].

Both of these shifts — oil trading and a dedicated tech exchange — confirm that the pure dominance of US capital markets is slowly weakening.

It’s not all going to happen tomorrow. But as the Chinese economy expands and absorbs more of world trade, Chinese capital markets must play a more central role.

It would be happening a lot faster if it wasn’t for the Byzantine system of rules and regulations China imposes to control capital flows and the value of the currency.

It is what it is. But it does show that the world never sits still. All of us in the markets are going to have to understand China as much as the US — or get left behind.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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