The Great Chinese Transition

Source: Zhang Chengliang/China Daily. June 4, 2012. China's superpower coronation is still some way off.

John D. Hock, CFA Chief Investment Officer

Altrinsic Global Advisors, LLC

Agenda

• “Making China Great Again,” The Great Transition

– From Old Economy to New Economy. From Picks, Shovels, & Smoke Stacks to Consumption, Services, & Innovation

– China’s Next Revolution? Artificial Intelligence And Surprising Technologies Where China Could Lead The World

– Lessons From History and Thucydides Trap

• Implications For Your Investments, Your Business, And The Global Economy

• Q&A

The New Champion of Capitalism?

Source: The Economist. January 21, 2017. The new Davos man. Xi Jinping portrays China as a rock of stability. But does he really want to be a global leader? 1

Pudong 1987

Source: Alan Taylor. The Atlantic. Aug 7, 2013. 26 Years of Growth: Shanghai Then and Now. Aug 7, 2013. http://cdn.theatlantic.com/static/infocus/shanghai080713/s1987.jpg 2

Pudong Today. In China, Things Get Done!

Source: Alan Taylor. The Atlantic. Aug 7, 2013. 26 Years of Growth: Shanghai Then and Now. Aug 7, 2013. http://cdn.theatlantic.com/static/infocus/shanghai080713/s2013.jpg 3

Unprecedented Investment Beijing-Shanghai Express

Source: Railway News. July 4, 2011. Beijing-Shanghai High-Speed Rail Starts Service. Credit: Agence France-Presse (AFP) 4

Has Created A Voracious Appetite for Commodities

Source: Visual Capitalist. September 10, 2015. Jeff Desjardins.

China Consumes Mind-Boggling Amounts of Raw Materials

5

…and an Economic Juggernaut

Source: Arvind Subramanian. *Weighted by share of world GDP, trade and net capital exports

Waxing and Waning Top three countries by economic dominance, % share* of global economic power

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And A Very Unbalanced Economy… Reform Takes Time and Has Consequences

Source: World Bank

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c-80

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91

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98

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08

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Chinese Fixed Investment(as % of GDP)

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Will This Trend Persist? What is the Next Stage of This Transition?

Source: Washington Post Writers Group. December 15, 2014; Credit: Lisa Benson 8

Reforms & Rooting Out Corruption

Source: Business Insider. August 22, 2013. This photo shows that China's massive Bo Xilai trial is an intricately orchestrated charade. Credit: REUTERS/Jinan Intermediate People's Court/Handout via Reuters. 9

“One Belt One Road”… And China’s “String of Pearls”

Source: Bloomberg. May 15, 2017. China’s Silk Road. David Tweed. Credit: Bloomberg.

China’s modern-day adaptation of the ancient Silk Road aims to revive the routes via a network of railways, ports, pipelines, and highways

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The Next Revolution in China Could be Artificial Intelligence “AI”

1Source: WIPO PATENTSCOPE database search; 2Source: The National Science and Technology Council (NSTC). (2016). The National Artificial Intelligence Research and Development Strategic Plan.

Deep Learning2

Journal articles mentioning “deep learning” or “deep neural network”, by nation.

Cumulative Patent Registration1

2010-2016

China

U.S.

Europe

0

300

600

900

Pate

nt N

umbe

r

11

A Supercomputer in 680 Million Hands

Source: CNNIC

50.4

117.6

233.4

302.7355.6

420.0

500.1556.8

619.8

695.3

0

200

400

600

800

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(mm)

Number of Users to Access Internet via Mobile Device2007-2016

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Who Needs a Mall? The Ecommerce Opportunity is Massive!

Source: JP Morgan, US Census Bureau, Statista, Company filings

Global E-Commerce Mainly Comes From China and the U.S., 2015

U.S. $0.4tr (20%)

Alibaba $0.6tr (26%)

Global $1.9tr

China $0.7tr (40%)

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China’s Digital Economy is a Story of Commercial Success and Excitement among Investors

1Refers to third-party payments conducted through mobile transactions. For China, mobile payments exclude bank or UnionPay credit-card transactions, digital wealth management, and digital finance. For the United States, payments are in-person payments on mobile between buyers and sellers, and remote payments on mobile devices. Source: Dealogic, eMarketer, iResearch, PitchBook, TechCrunch’s CrunchBase Unicorn Leaderboard, McKinsey Global Institute analysis.

Mobile Payments in 20161

$790

$74

0

300

600

900

Billi

ons (

$)

China U.S.

11x

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The Environment. Huge Opportunity and Risks. CCTV Tower from CLSA Securities Beijing Office

Source: Harvard Magazine, October 2008. Credit: James Fallows. Source: MyWorld.ru, January 2013. 15

Tourism. No Longer About Shopping and Gambling.

Source: Perth Now. Northern Territory. Credit: NT Tourism 16

Australia a Popular Destination. Chinese Represented 15% of Australia’s Total 8m Tourists in 2016

Source: CLSA, ABS

1,347 1,199

717 711

440 414 388 285 260 249

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1,200

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Origin of Australia's Top Inbound Passengers

New Zealand, 16%

China, 15%

UK, 9%

USA, 9%

Singapore, 5%Japan, 5%

Malaysia, 5%South Korea,

3%

India, 3%

Hong Kong, 3%

Germany, 2%

Other, 25%

Inbound Passenger Mix

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China45.3%

Japan25.7%

Australia6.6%

South Korea5.1%

India, 4.8%

Philippines, 2.5%Thailand, 1.6%

Indonesia, 1.4%Others1

7.0%

Share of Media Total

China

Japan

Australia

South Korea

India

Philippines

Thailand

Indonesia

Others

Targeting the China Consumer. Opportunities in Advertising, Sports, Media

Source: GroupM. 1Note: Others include Vietnam, Hong Kong, Taiwan, New Zealand, Singapore, Malaysia, Pakistan, Bangladesh, Sri Lanka.

Total Media Advertising Spending by Country in Asia Pacific (2016)

China’s advertising spending accounted to nearly 50% in Asia Pacific followed by Japan and Australia.

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Education

Source: Daily Mail. April 13, 2015. Testing conditions: More than 1,700 Chinese students forced to sit exam in school playground because there isn't enough room for them all inside. Keiligh Baker. Credit: China Foto Press via Getty Images 19

But There Will be Traps in the Consumer Story! China Breweries’ Operating Margin was 17% Below Global Peers…

Source: FactSet

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Operating Margin for China and Global Breweries (2016)

China breweries

average 5%

Global breweries

average 22%

20

What Are Primary Risks?

As of 06/30/17; Source: Bloomberg

Excessive Debt in an Unbalanced Economy

150

175

200

225

250

27520

04

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

(%)

China Total Debt-to-GDP Ratio

CHN need reforms in many areas. The financial sector, state owned enterprises, healthcare… environment

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Demographics. China Will Get Old Before it gets Rich.

Source: UN Data

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1,200

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80(mn) (%)Working-age Population Has Peaked

Working age population (15-64) % of total population (RHS)

Projection

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The Blue Water Navy

Source: China.org.cn December 20, 2016. Chinese navy goes 'blue water'. Credit: China.org.cn

The Geopolitical Landscape has changed in a meaningful way. 23

Summary • China is embarking on a long-term mission of “Making China Great Again”

– Truly long-term in its planning and horizon – Not encumbered by democratic processes – In China, things get done, leapfrogging others in infrastructure and

important technologies

• China is in transition in some obvious and less obvious but very consequential areas

– From…picks, shovels, smokestacks, and cheap exports…. – To…the next stage is all about consumer and the big surprises will be

in technology and artificial intelligence

• The risks are massive. Be mindful of the Blue Water Navy. And we must respect the Thucydides trap.

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