Asia Capital Development 2.0: The Secret Asian Blueprint

 
 

Two years ago, I revealed the secret blueprint for global investors who are seeking profit and want to understand Asia’s economic boom.

As a veteran who has lived and invested in Asian markets for over fifteen years, I’ve striven to crystallize all my experience into a simple model, something easy to understand and implement, called the Asia Capital Development model (ACD). The goal is for this to serve as an investment compass informing global investors of the region’s mechanics and changes:

 
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Lately, I’ve been considering the how ACD has evolved and how to “update” this model accordingly, as many Asian countries are adapting socially and economically to the new world environment. Here are some of my musing and thoughts about how best to adapt ACD.

1. Land Reform

Agricultural land is the first asset that is acquired and developed by the central government, sometimes forcefully, and then redistributed by the ruling elite. Since the end of World War II, we’ve seen similar land reform across Asia — in China, Japan, Vietnam, Indonesia, and South Korea.

Eventually, central planners of many Asian governments realized that the private sector can do a better job at running these industries, which results in a reduction of state-owned enterprises in the agricultural sector. Such a policy leaves room for large corporations to grab land and consolidate their land ownership in the country.

A good example would be China, in which small private lands are incorporated into “land circulation trust” and then rented out to larger corporate entities following the country’s agrarian reform policy in 2013:

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2.Manufacturing Sector

Once an economy has a strong agriculture sector, it then will move onto developing their manufacturing industries.

Think of Japan, South Korea, and China, who all have played the “manufacturing hub” role for the Developed West.

 
 

The growing manufacturing sector will also experience natural selection, in which weaker and inferior companies either go into bankruptcy or are bought out by competitors while government subsidies and low interest loans flow into favored industries, SOEs, and high-performing businesses. A prime example is China’s Huawei and its competitive bid for 5G implementation as part of the communist country’s 2025 Made in China blueprint.

Further consolidation in the manufacturing sector will occur, spearheaded by foreign direct investment from multinational corporations.  Manufacturing is to be dominated by both large domestic (think “chaebols”) and foreign-owned corporations.

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This is manifested in the uptrend of inbound cross-border mergers and acquisitions in both size and deal value.

And as a manufacturing-based economy evolve to become a service economy due to rising labor costs and automation, the production of commoditized goods shift from more developed to less developed countries, which results in a decline in manufacturing jobs and rise of service jobs.

Remember Akamatsu’s Flying Geese Paradigm?

We see this transition in many OECD countries to the right.

3. Financial Sector

Another important milestone in ACD is the rise of household debt and rapid urbanization.

In the case of Vietnam, the urbanization rate is projected to reach 40% this year, as people move out of the countryside and to urban areas. This implies this new labor force will be joining the service sector looking for work.  These new arrivals will utilize financial services such as credit by banks, often for the first time, and allows for two things to happen:

First, there will be a decline in the savings rate due to credit opportunities newly made available to the individuals. And second, these people will increase their extent of household debt to the limits because of low interest rate environments.

 
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4. Deficit Spending

The Keynesian economic view that $1 of government spending will increase total economic output by more than $1 no longer is the compass for monetary and fiscal policy of many Asian economies.

This is due to the evidence of falling marginal debt productivity and high public debt figures that appear wearisome to citizens and their governments

In the last decade, we have seen government debt as a percentage of GDP either decline or flat line across Asia.

 
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Nevertheless, we still believe that the governments of these countries will continue to apply deficit spending in time of recessions in order to stimulate ailing economies.

5. Key Takeaway

As global investors, it is important for us to be cognizant of Asia’s dynamism, and how their economies are consistently evolving. Past knowledge of the region may not be relevant anymore, as countries grow to different phases of ACD with varied and unique characteristics.

To adjust to these new changes, we must constantly question and update our knowledge, thereby enhancing our understanding of the region allow us to formulate new strategies in order to take advantage of these changes.

 
Peter Pham