8 Key Insights on China & Hong Kong

From Veteran Investor Ronnie Chan


Hong Kong and Chinese stocks have been beaten down recently, with many trading at multi-year lows. 

However, there are real structural changes underway in China that investors need to understand. 

 Investors should not rely solely on cheap valuations before investing.  

To better comprehend the situation, insights can be gained from Ronnie Chan, Chairman of Hang Lung.

Hang Lung is a leading commercial real estate developer with a strong track record in mainland China and Hong Kong.

Hang Lung has a long history of investing in China, dating back to the 1980s. The company was one of the first foreign developers to enter the Chinese market, and it has since built a portfolio of over 40 properties in mainland China.

Hang Lung's malls in China are located in major cities such as Shanghai & Hangzhou. Hang Lung is also a major player in the Hong Kong commercial real estate market.

As a Western educated businessman with lots of experience investing in China, Chan navigated the real estate turmoil much better than his peers.

Furthermore, Chan is a prolific writer whose annual letters offer useful insights from an owner-operator perspective. 

 His latest letter provide a balanced perspective on the realities facing Hong Kong and Chinese companies during this period of uncertainty. 

 I have summarised it into 8 key takeaways:

 1. Structural Changes Underway in Hong Kong's Economy

Hong Kong's economy is undergoing systemic change due to reduced globalization, the city's diminished role as a gateway to China, and shifts in the property market. 

The economy that once thrived on trade and investment flows between China and the world is declining. The real estate boom years are over as land and housing prices face downward pressures with increased supply. 

Though painful in the near-term, these shifts can make Hong Kong more competitive. But the city must adapt quickly to stay relevant amidst the challenging transition.

2. Confluence of Issues Make China's Slowdown Particularly Difficult 

China is experiencing an economic slowdown due to four key factors all happening at once: the costs of its dynamic zero-COVID strategy, regulatory crackdowns on industries like tech and education, the decline in the residential property market, and increased political pressures from the United States. 

The combination of domestic and external issues makes recovery difficult. 

Consumer and business confidence has dropped significantly. With limited room to manoeuvre, policy options are constrained. 

 3. Luxury Retail Resilience Defies Broader Weakness

Despite the headwinds, luxury retail remains a rare resilient bright spot in China. High-end brands continue to see sales growth both domestically and globally from Chinese shoppers.

For Hang Lung, its mainland China malls have achieved 23 years of uninterrupted rental growth in local currency terms.

Rental revenues from its two Shanghai malls have each grown over 10 times since opening. 

Top global brands are still in early stages of penetrating the vast wealthy demographic in China's huge population. 

4. Tourism Spending Shifting, But Per Capita Still Low 

Chinese tourism spending is redirected back to high levels of domestic travel as outbound trips are restricted. 

However, per capita spending is below pre-pandemic levels, though hotels and tourist sites are crowded. 

For a full recovery, China will need to improve consumer confidence. Tourism's contribution to overall retail sales is still muted, as seen in Hang Lung's mixed mall performances.

5. Hong Kong Faces Deep Structural Challenges 

Hong Kong's outlook is clouded by weak tourism, trade, logistics and the housing market downturn. The economy lacks clear growth engines. 

Office rentals reflect soft demand, especially in finance. Retail rentals are recovering gradually, led by prime location malls. 

More land supply and home prices falling from unaffordable levels will impact sentiment. 

Structural changes in its property markets will present lasting headwinds.

6. Business Confidence and Investment Depressed 

Business confidence in China has dropped sharply due to uncertainty over government policies. Investments are on hold until clarity emerges on policy directions and reforms. 

The country's focus on domestic circulation will require transitioning from an export- and investment-led economy. 

But for now, concerns over US-China conflicts and domestic crackdowns are paralyzing enterprise risk appetite and capital expenditures.  

7. Consumption Key to China's Growth Amid Weak Drivers

With exports, tourism, and investments all under pressure, China will need to depend more on domestic consumption. 

However, consumer confidence remains weak currently. 

High savings provide a buffer, but citizens are careful with spending on big-ticket items like cars and housing. 

 Market-driven policy reforms matched with social stability can help stimulate employment, income and spending power. But a turnaround requires resolving internal and external challenges first. 

8. Caution as Hang Lung Navigates Uncertain Environment 

Hang Lung's premium positioning in commercial real estate has allowed it to navigate difficult times. 

However, the current climate carries exceptional uncertainties.

Hang Lung will exercise prudence, conserve cash, refrain from major expansion, and focus on its profitable high-end malls and offices. 

Though growth has slowed, its performance remains respectable. With its strong foothold especially in mainland China luxury retail, Hang Lung can emerge strongly when conditions improve.

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