A thirty-year perspective

Thirty years ago Herald van der Linde made his first trip to China. In the years that followed he worked initially as a tour guide, seeing vast swathes of the country. These experiences proved formative for his subsequent career in finance (he is now HSBC’s head of Asian equity strategy). In his new book Asia’s Stock Markets: From the Ground Up, van der Linde offers insights on the leading themes investors should look at when buying Chinese stocks for the long term. WiC spoke to him about his early experiences in China and why he’s now a fan of investment in companies tapping into the ‘DINK’ consumption story.

The target audience for this book is airline pilots who want to invest?

Airline pilots, dentists, yes! The idea for the book came from a friend of mine, a pilot, who now lives in Brisbane. He retired not too long ago and he had saved up some money. At a dinner he asked those there: ‘What should I do with my money?’ One guy told him to buy options. Another brought up a Norwegian construction company. By the time it circulated towards me, the conversation had gone somewhere else.

But afterwards he came over to me and said he was serious and asked my advice. I asked if he’d heard of Black-Scholes, which he hadn’t. So I said if you know nothing about that, you shouldn’t go into options as this is at the core of options pricing. He’d never been to Norway either, so I said that was another idea he should forget about.

Instead I suggested he buy an ETF. He asked: what’s an ETF? He knew everything about Airbuses and Boeings but had no clue what an Exchange Traded Fund was. So I sat down and explained why he should buy an ETF on the S&P 500 and leave his money there for a lengthy period of time like he was buying a house. He did that and made some nice money out of it.

It was around that time that I decided to write a book. I wanted to write something that was accessible about investing in equities and – thanks to my background – specifically about Asian stock markets.

When you went to China for the first time in 1991, presumably you knew nothing about equities?

I studied economics, so I probably thought I did know about equities, but in fact I didn’t! I remember seeing riots in Shenzhen in 1991 over an IPO because the paperwork wasn’t correct. People were pissed off for good reason and they were on the streets. I actually went to see it.

Looking back, that was when the equity markets were really opening up and starting to develop. It was historic to have been there at the time!

What do you recall about that first trip?

In those days China was a closed place. Most tourists came in on package tours arranged by China International Travel Service, and stayed at particular hotels and could only go to particular shops. For that they had what were called foreign exchange certificates (FECs). I was a backpacker and didn’t really have the money for those sort of trips. But I soon discovered I could exchange my FECs with people on the street. They wanted them because it allowed them to purchase luxury goods.

I remember walking into a bank and changing my travellers cheques and they gave me the FECs and the moment I came out, there were about 25 people who all wanted to exchange my FECs for renminbi.

I suddenly realised I could make some money here. The amount I converted was worth 30% more than the yuan value of the FECs. For me that was quite a lot of money at the time!

So some of the key ingredients of understanding China’s ‘split’ markets became clear to me back in 1991 – although I didn’t realise the consequences fully at the time.

You were robbed too?

My very first Asian trip was to Indonesia in 1990 and a guy I met there said to me that China was the place to go, because it was opening up. At that time very few foreigners were going to China – on my first trip I met only one Canadian and a handful from Israel and South Africa. I flew into Hong Kong and went straight across the border to Shenzhen. I got to the train station and after changing some money I was sitting down to put it in my pouch when someone punched me on the nose and my cash was gone. That was a very bad start. I exchanged some more money and was more careful second time round.

It got worse. Shenzhen was a noisy building site back then. Everything was covered in white dust – it wasn’t very environmentally friendly. After walking around for a bit, I thought I can’t stay here!

I’d purchased a ticket in Holland to fly to Guilin and went to a travel agent and asked whether I could fly that afternoon. It turned out I could. But the plane I took ended up crash- landing in a paddyfield, when it skidded off the runway after one of the engines failed. They opened the doors and the crew were out first, followed by everyone else. It was complete mayhem. When I disembarked I sank into a paddyfield up to my knees.

By 6pm that evening I was sitting in Guilin airport. Remarkably my bag had come off the plane and I’d picked it off the baggage carousel. At this point I am thinking: what am I going to do… I’ve had my money stolen, I’ve been in a plane crash and I haven’t even been in China for 12 hours!

I didn’t speak good Chinese – I learned some along the way – but an old guy came over to me and said come with me. He gave me a bowl of noodles for free, allowed me to clean up and asked me where I was going. He put me on a bus to Yangshuo and spoke to the bus driver. I didn’t even pay for the ride. So I saw a lot of different dimensions of China – bad and good – that day.

In the years thereafter I became a tour guide and travelled round the country four times a year until the end of my university studies.

So you were in China a lot during the early 1990s…

I studied under quite a flexible professor called Angus Maddison – he’s the academic that produced famous charts about China’s relative GDP size versus the rest of the world through the centuries – and he told me to travel in China and keep studying and he would give me oral examinations when I felt I was ready. So it was a great time. I’d be in China for months and then return to Holland.

What are your other memories of that period?

Apart from China being much, much poorer (there were a lot of beggars) I remember there was so much construction. Large parts of what we now call central Chengdu were being built in those days. At the time there were few cars but still lots of bicycles.

Over time my Chinese got better. My interactions with people got better. Quite a few were interested to learn more about Holland and I was curious about their recent history.

The travelling was quite adventurous. We’d go to places that were then off the beaten track like Dali and Lijiang, and even travel by horse into Tibet.

There was no domestic tourism in those days. That’s one of the big changes now. If you go to Lijiang now it is full of local Chinese tourists, who far outnumber foreign visitors, even before Covid.

Would you have guessed in the early 1990s how much China would change and how quickly?

No, I am living proof of it too. When I graduated in 1994 with a Masters degree, I went to Indonesia. I was under the impression that Indonesia had better prospects than China. That was an absolutely huge historical error on my part!

But remember, back then it was far harder for foreigners to get employment in China and it would be another seven years before China joined the WTO. Indonesia was booming at the time. So I flew on a one-way ticket to Jakarta and joined the broking industry there.

In your book you talk about playing the big investment trends in China. For instance, you talk about the power of Chinese consumers…

One of the big stories that is unfolding in China is its transformation from an export-led economy to one more reliant on domestic consumption.

What is not so well understood is the spending power of the ‘dual income, no kids’ demographic, or DINKs. It’s a large group of people who are very well-off and a key driver of this shift towards consumption.

They are the biggest urban consumer group at this point in time – and will continue to be so for the next decade. Many went to work for a Chinese company from 1994 and already had four or five years of experience when China joined the WTO. They had reached middle management and then saw their companies grow phenomenally. They had nice careers and they bought their property cheaply when the sector was liberalised in the late 1990s. Since then the market prices of their apartments have gone up four or five times at least.

These people have done very well. They have cars, they are in their late forties and have had one child – who is now in his or her twenties. So couples now have more income to spend – they are dual income. They are spending on tourism and going to nice restaurants. If they visit friends they take a bottle of good wine or Moutai baijiu along. They are trying to stay healthy – buying pharmaceutical products, sportswear and fitness stuff. You can see that in the stockmarket now. The shares of sportswear companies and Moutai have performed really well, for instance.

A lot of themes emerge from this group: the One-Child Policy, how China is aging, empty-nesting etc. This group – and these evolving trends – are shifting Chinese consumption patterns in massive ways.

So if you were talking to your Aussie pilot today, you’d advise him to buy an ETF linked to the DINKs consumption patterns?

I cannot recommend individual ETFs but there are sectoral ETFs like these in China. He could definitely buy exposure to that theme, either through ETFs or stocks. In my book I recommend identifying these structural themes and investing in them for the long term.

My overarching advice is to buy these portfolios of stocks as if they were your house. You typically think about owning a house for 10 or 20 or even 30 years and you don’t look at its value every day. That’s the way I think ordinary investors should play these big Chinese themes.

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