New Money (2019) – BONUS Full-Length Documentary Interview with Peter Churchouse

New Money (2019) – BONUS Full-Length Documentary Interview with Peter Churchouse


Peter Churchouse is
another person who has seen China like few others. He’s a successful
business man who arrived in Hong Kong
in 1980, and soon went on to run Morgan
Stanley’s Asia division. He was there long before the
explosive growth of China. He’s seen it all
happen firsthand. I came to Hong Kong in 1980, so
I’ve been here nearly 39 years now. I came to help build a new town
in the new territories in Hong Kong. And at that time,
Shenzhen, which is the city just
north of Hong Kong, that that city
was not a city, it was a village of
about 300,000 people. And you’d walk
around that village, there were people
blacksmiths beating, charcoal implements
in the street. There were no buses,
no taxis, no cars. Now it’s a city of
11 million people. It’s the center of the
biggest manufacturing conglomeration in the planet. That area now has a
GDP roughly the size of Russia, slightly
smaller than Spain. And that was nothing, it
had nothing 38 years ago. So that’s the kind
of development. Potentially the highest
tech company in the world. Oh yes. I mean, so many of the China and
the European and American tech companies have their
operations based in that area. 66 million people in
that area right now. It has the biggest manufacturing
center in the world. It has 400 million
air passengers flying through that place. And people just don’t
quite get that, you know. It’s so huge, and
it’s gone from, as I say, from t-shirts
to drones to smartphones. And is it going to be investing
a lot more money in research R&D, I think, in that zone
over the next few years. So you can expect to see that
Shenzhen special economic zone, that whole area become probably
one of the most important tech hubs, I think, on the planet. They would like to
rival Silicon Valley. I’m not saying they
will, but I think that’s kind of their objective. One of the extraordinary
things for me also was when I visited
Shenzhen in the 90s, it was unattractive
to say the least. It was an industrial area,
you know, manufacturing, but old school manufacturing. But today there was
so much green space, and I’ve seen that and
all the Chinese cities. Can you talk? Yeah. I mean, if you think about it,
when you visited these cities back in the early days,
they were pretty soul destroying places
to a large extent. So they’ve started from
a blank sheet of paper. So they’ve leapfrogged all
of that antique technology and they’ve gone straight
to 21st century stuff. And as a result, they’ve
created urban environments in many respects,
which are in some ways better than what you find
in many developed countries because they’ve
started from scratch. They’ve planned it
from square one. And particularly, you
can see that in places like Pudong and Shanghai. When I first went to
Pudong, it was like a scene out of a Mad Max movie. It was awful. It was just soul destroying. What year was that? Was in there in the
late 80s, early 90s. And of course, they started
that planning of that area. It was just squalid
industrial nothingness for mile after mile. And within five
years, it built well over 100 high rises, some of the
tallest buildings in the world there now. Beautiful boulevards laid out,
huge estates housing and so on, the new airport. That was all done in
less than 10 years. And so the resources that get
applied to these situations in the urban context, it does
some really interesting stuff. Of course there’s a lot of stuff
that isn’t that great either. But by and large, I
think it’s a lot better than was there before. So you told the story about
one of the first real estate missions you went to Shanghai. Can you tell that story? Yeah, that was very amusing. I was working in a real
estate consultancy and– What year was this? In Hong Kong called Jones
Lang Wooden, in those days. It’s now Jones Lang LaSalle. And somebody commissioned us to
do a study of the office market in Shanghai. So we zoomed up to Shanghai,
and really this research study took all of about an hour
and a half or two hours because it was
only one building, one modern office
building in Shanghai. And this was back in
87, about that 86, 87. So to do a survey of the
office market literally took us half an hour. That was it. And what was worrying,
everybody was concerned because there
was another building under construction,
and the fear was this one building would lead to
a massive oversupply of space. And of course, you
look at that now and you think how
ridiculous that notion was when you look at just
hundreds and hundreds of state of the art modern
high rise buildings. You know, 80, 100 stories
high, this kind of thing. At the time, it
was one building. That’s not that long ago. That was only in– that’s only 87, 88, so that
shows you the sort of pace. 30 years. Yeah, unbelievable. That’s amazing. Yeah. You’ve been Asia strategist
for your whole career really. I mean, I realize
it’s been real estate, but you’ve been
tracking Asia at least. Can the moment that
you see now in China, does it resemble like– I don’t know if you go back
to the Industrial Revolution or to a time in another
country in your career. I think it’s very
interesting, but I think genuinely the
transformation we’ve seen in China in
the last 30 years or so is nothing like anything
we’ve seen anywhere else. Yes, the Industrial
Revolution, that took place over 50 or 100 years. This has taken place
over 10 or 20 years. And the scale of
the transformation is much more rapid than
anything we’ve ever seen. So you’ve gone from
agriculture, farming communes. Nobody owning anything to a
society where people have now got a livelihood. They’re some of the– they’ve really jumped into the
middle class, the middle income category. Hundreds of millions of
people brought out of poverty. Now that, I can’t
remember having seen that anywhere else in
my lifetime, that’s for sure. No, well the thing here
is if you think about it, China has lifted 600 million
people out of poverty over the last 20 years
or so, and they’ve been brought into
middle income status. And in the next 20 years,
China will become a high income status country in my view. So that transformation
is probably the most rapid and significant,
I think, in humankind ever. You’ve seen other
little countries, they get an oil rush, you know. The Middle East you
get oil comes through and oil prices jump up, and
suddenly they’re very wealthy, but it’s 10, 20 million people. This is over a billion people. And it’s not stopping here. There’s still a long way to go. As I said earlier,
you’re going to have another 150 million
people move into cities and live in modern homes
and do jobs and education and so on and so forth. So I think this is, you
know, we’re 30 years into it. We’ve probably got
another 20 before we get to what one might
call a mature economy. We’re still a few years away
from that, so let’s enjoy it. So yeah. So what would you
urge investors to do? Well my sense is
that look, you’ve got to look at a place like
China as a long term thing, not really as just
a trading market because it is very volatile. And I think you’re going to look
at it as a point of view that this isn’t– it’s not only a growing and
rapidly growing economy. It’s a transformative economy,
and it’s going up the value added scale very, very rapidly. That this trade war, I think,
or what passes as trade war, I think it’s going to generate
a huge amount of investment into high tech
businesses in China. And these guys are going
to grow very, very rapidly. You know, so many industries
Biotech, Biochemistry, drones, artificial
intelligence, robotics– they’re putting billions
and billions in R&D and development in these areas. And that’s where I
think you’re going to see a lot of
big opportunities over the course of
the next few years. And as Chinese people themselves
invest in their own market through institutions like
pensions and insurance companies and banking
products and so on, you’re going to see this market
easily become a mature market, could double, triple
in the next 10 years. So would you for a four or
five to seven year investment, would you put your
money on US blue chips or Chinese blue chips? Well put it this way, the
relative valuation right now– yes, the US still looks
very good in short term. But I think when you look
at relative valuation, China’s down here in valuation,
America’s up here a valuation. That’s going to
come into balance I would say over
the next few years. And that suggests
that China’s valuation is going to rise to
become a little closer to the Western markets,
and particularly to the US. This Hong Kong is the fourth or
fifth biggest financial center in the world. Macau is by far the
biggest gambling center in the world,
seven times the revenues of Las Vegas strip. So you know, people don’t
understand the scale and dimension that we live in
this little corner of China. You mentioned Macau, the
growth truly is staggering. I remember just a
few years ago when they said is Macau
going to pass Las Vegas? Could it ever pass that? And then tell me
what’s happened. Well of course now, it was
only about 10 years ago it was about 2/3 the
size of Las Vegas. Now it’s like six or
seven times the size of Las Vegas in
terms of turnover. And their shifting the mix. It’s not just
gambling and gaming. They’re doing a lot more
in terms of exhibitions, conferences, family
entertainment, and so on. And a lot of that growth is
spilling over across the border into China itself. So it’s not just now in Macau,
it’s across the border in China as well. And it’s the only place
in China you can gamble, so that makes it a very
attractive place to be. In this part of the world,
people love, love the horses. They love to gamble. They love the card tables
and Macau is where you do it. So speaking of gambling,
can you tell me a little bit about what
the actual Chinese, the local Chinese
investor has been like– the stock market
investor in China for the last say, 15
years, versus what you think they might look
like five years from now. Yeah. I mean, basically the
Chinese stock market really only started in 1991, 92, 93. It’s almost totally
driven by retail. It’s not driven by
institutional investors the way Western markets are. And when you say retail,
what does that mean? Private individuals,
families, trading platforms, corporates putting their money
to work in the stock market. It’s not driven
by pension funds. It’s not driven by mutual
funds and insurance and so on, but that is going to change. As China develops, we’re going
to see much more institutional activity in the market,
and that will bring, I think, not only
growth, but I think it’ll also bring stability,
a little less volatility to the market. Because at the moment, being
retail driven, people jump in, they jump out. It’s extremely volatile,
but that’s going to change. Because at the moment,
China families, China people have very few
avenues to invest their money. They are great savers. Save something like 45%
of national income GDP is actually saved. So where does that money go? Not many places to put it. Of course, one of the places
that goes is property. And the stock market is
the only other place. There is no mutual
fund industry. So I am expecting I could see
that market over the next four or five years, you
could see a period when that market doubles, maybe
even 150% over the period of a year to 18 months. What market is this? And that’s– I would say the
A share market in China could easily put on that kind of pace
over a period of say 12 to 18 months, because it’s starting
from now from a very low base. Unbelievable. So you’re talking
about pension funds and institutional
investors coming along. So are there any
obvious opportunities when these larger institutions
become investors in the market? Well of course, as
the markets opened up, it’s becoming more accessible
to foreign investors as well. So as the market
develops, you’re going to see that more and more
foreign investors will access that market, so that’s going to
be another driver to the stock market. As you know, MSCI is
increasing its weighting in its global indices of the
Shanghai and the Shenzhen stock market. So that will attract foreign
investors increasingly. Yes, it’s only a small
proportion at the moment, but if we go along over
the next few years, that’s going to be a
significant factor as well. So you’re not only going to have
the domestic players growing the pension funds, the
insurance companies, and so on. Many of whom are listed and
are tremendous investment opportunities in
their own right, but you’re also going to get the
foreign institutional investors coming in as well. So is there a sector
that’s particularly cheap that’s going to
benefit significantly from these pension assets? Well I think the banking
and financial sector is very, very cheap. If you look at the
big four state banks, they are the biggest
banks in the world in terms of deposit base. They’re trading at 0.7,
0.8 times book value. Where do you find huge mammoth
banks trading that cheap? It doesn’t happen. 5/6 times earnings. They’re growing at not
particularly rapidly at the moment, but as the credit
issues get solved in China, these banks are going to
grow earnings at 10% to 15% and they’re trading at
that 0.7 times book value. That’s the wrong price
for banks on that scale. I mean, double is
easily possible. Absolutely. You could easily see
these banks trading at 1.5 or six times book. That’s a doubling in
value, not including– Not including earnings growth. Yes. As well. And at the moment, they’re
giving you a 5% or 6% dividend yield as well. So you’re being paid
to wait at the moment. So that’s the sector I like. The insurance sector
we’ve mentioned. Again, there’s just an enormous
growth potential in that area. And my specialty of course
is the real estate sector. Well tell me a little
bit about that. Americans see China is
this communist place. And meanwhile, they may
think that this is where their cheap t-shirts come from. Meanwhile, an
apartment in Beijing is over a million dollars. So how does real estate– any comment– can you give
us a comment on real estate. If you think about it– So Americans can understand. You think about it, 20
years ago, 25 years ago, it was impossible to
own property in China. Nobody owned property except
the state or the communes. It was all held by the state. Now private ownership
is possible, and that has produced
this enormous boom in urban centers,
urban ownership. Something like 56% urban rate,
urbanization rate in China right now. That was 24% 20 years ago. So you’ve from 24%
living in cities to 56, 58% living in cities. That’s going to go to
75% in the next 10 years. So we’re going to see another
130, 150 million people move to the cities in China over
the next 10 or 12 years. They need to be housed. Who’s going to do it? They’re going to want to
own their own housing. So that’s a big growth sector. These stocks are
trading right now. I can buy top quality stocks
at 5/6 times earnings. Unbelievable. And giving me a
7% dividend yield. Unbelievable. So where in the world
can you do that? It’s very, very rare. So yes, the sector is under a
bit of a cloud at the moment, but when I see
companies that trade in that kind of
valuation, I think I can afford to wait till
the market sentiment turns. So this is a genuine question. We’ve got this incredible
growth in this country in China, and we’ve got these incredible
tailwinds coming, their longer term tailwinds. And you know, we know
the growth story. So why are stocks so cheap? What are people afraid of, and
what would be the catalyst? Any ideas? I mean, at the moment
it’s really macro driven. So trade war. Yeah, obviously the trade
issue is a big negative for all emerging markets,
and particularly for China because it’s been such a
big export oriented country. But most of Asia
is export oriented. So all of Asia is being
hit here quite badly. The other negative
in China right now is the credit, credit extension. You now have a total debt
to GDP ratio of about 260%. A lot of that in corporate
debt, not household debt, in corporate debt. So there is some
concern that that could lead to some kind
of financial crisis. I think there’s certainly going
to be an increase in defaults and non-performing
loans, but I’m not expecting a financial crisis. I think with 3 and 1/2 trillion
US dollars of reserves, and the banking system,
which is totally under control of the government,
they see these problems and they are constantly doing
stuff every week, every month to address the problems. And I’ve watched
it so many years, that when they see
these problems, they act and gradually
they fix them. And I think this financial issue
will be one of those problems like we’ve seen before, which
they would just gradually fix. And 18 months from now, we
won’t even be thinking about it. Two years, it’ll be a memory. Wow. Now you have been
here almost 40 years. The Hong Kong stock
market has been one of the most volatile markets
over that period of time. So you have seen incredible
busts in your lifetime here, but then you’ve seen the
long term results of this. So can you talk about
what a bust looks like. How bad it can
be, and will there be busts along the way
in China’s stock market? Well of course there will
be, because there will always be, like any country, there’s
always going to be excesses take place. And we saw it in China
three or four years ago. The retail investors buying
the market like crazy, market went up to over 5,000. Stock prices were
through the roof. Earnings, price earnings ratios
were at 50 times earnings, and that’s unsustainable. We kind of know that. And so, but we
don’t see that now. We will see it again I’m
sure, but at the moment that’s exactly the opposite. And where we’re facing,
I think, at some point in the next 18
months or two years, we’re going to start to
see sentiment coming back the other way. So Hong Kong– Hong Kong is like a pimple on
the backside of an elephant if you think about it. We’re a city of 7
million people– as the conduit for finance
for a country which is the second largest
economy in the world, Hong Kong acts as a
financial conduit. Money comes in and out. The trade comes in and out. The ideas, the
technology, the expertise comes in and out of the city. So as long as that continues,
which I think it will, we’re going to see Hong Kong,
I think, as a reasonably bright future economically. Politically might
be very different, but economically I think
it’s a pretty bright future. And within that,
you’re going to see much more growth of
institutional investment in China itself through
the pension funds. You know, hardly anybody has
a pension in China right now, a private pension. There’s not a big
mutual fund industry. So there’s not a big
insurance industry. So as these
industries take root, they are going to be
big investors as well. So you’ve got not just
the retail, not just the foreign
investors, but you’ve got a burgeoning institutional
investment universe locally. And as I say with the
savings ratio of 45%, that savings needs to
be invested somewhere. So the stock market
is going to be a home for a lot of that money. And you’ll also see the bond
market grow rapidly as well. Mainly corporate bonds, I think,
rather than government bonds, but that the bond market
is going to be a big place to park money as well. So any very simple way– if we were at a cocktail
party in Nebraska and someone said why China? Do you have just a simple– you know, I don’t
believe in China. Tell me tell me in a sentence
or two, if you can boil it down. And again, you’re
talking to the guy who thinks China is a bunch of
communists, a bunch– you know, he doesn’t know
anything about China. Why China? Well China is an example
of a country that has gone from the stone
ages into the 21st century and over a space of 30 years. So it’s really a
fundamental transformation of a society and an economy. Which the likes of
which I’ve never seen. I don’t think anybody’s seen
this kind of transformation in this kind of time frame
anywhere in the world. Not least a country
with 1.3 billion people. So from a– it’s just
a pure transformation, structural reform growth story. And that’s what you’re buying. And China’s becoming part
of the global framework of the economy. They’re so far into it
now, they can go back. And we just, I think, you’d be
crazy not to participate in it even in a small way. You don’t need to
jump in boots and all, but I think this is
a growth story that’s going to run for at least
another 10 or 20 years. And, you know, I’ve
been here 38 years. I’m hopefully around for
another 20 to participate in it. You know, I think the thing that
most people have to remember is that China isn’t a
communist country anymore. It’s not a Marxist
communist regime like it was under Mao Tse-Tung. It is advanced
much more into what you might call a form of
autocratic capitalism. It’s still a dictatorship. It’s still an autocracy. It’s not a true democracy by
any means, but think about it, most of the economy is now run
by private sector interests. By private companies who
are doing their own thing investing, doing
that they want to do. Families can pretty much live
where they choose these days. They can get educated
the way they want. They can own their own home. They can invest
in stock markets, invest in all sorts of products. Still a lot of restrictions. Nowhere near as free
as in the west perhaps, but it’s certainly not
a communist country in the way that Marxism
says that all resources must be owned by the state. That is not the case
in China anymore. It was 45 years
ago, but not now. Well I’ve known Steve for
probably nearly 20 years now. I knew him well
before I met him. I knew him via his
research, and I started subscribing to
his newsletter back, oh, must be around
the turn of 99, 90, 2000, something like that. I liked his ideas. I liked the fact that he took
an international view of things, unlike many other
people who look at the business of analysis
and subscription newsletter writers. And he had so many
good ideas, and was a very balanced and
positive view on markets which really attracted me. And that was purely by chance
I met him at a Morgan Stanley conference in Japan. And I bumped into
this guy that he said, well I’m Steve Zagurak. And I said, oh gosh, I’ve
been reading your newsletters for years now. Lovely to meet you. And of course, we
became great buddies. And he’s been a
great friend to us in our business and
our publishing business and our investing business. And I take a lot of what
Steve says very seriously, and I’m always keen to
read, listen to his views and read what he has
to say on markets. And I say, he’s one of the few
people in this industry that really is an internationalist
and takes an international view of investing opportunities. Tell me a little bit
about his melt up theory. Your thoughts on
that and the US. Well I know people are talking
about a possible melt up in the US, and I can
understand the logic behind it. Because if you think about
it, yes the market in America is a bull market right now,
but it’s not a manic market. It’s not gone absolutely crazy. It’s nothing like we saw in
the 99, 2000 tech bubble. The US market is
not in a bubble. It’s not in a completely manic
phase of irrational exuberance. Yes, it’s expensive. Yes, it’s bullish. But I think there
is the potential to see a final melt up similar
to what we saw of say 99, 2000 before the tech bubble burst. I’m not saying it’s
going to happen, but there’s a distinct
possibility it could. We’re not on that phase yet. I do, yeah. Is that me? Yeah. Yeah. No that’s just a little
alarm on the instrument here. That just tells us the
boats going to sink.

9 comments on “New Money (2019) – BONUS Full-Length Documentary Interview with Peter Churchouse

  1. If I had to go buy my logic brain those numbers of people are very attractive and in the less amount of time brought there citizens up. So that's growth but I have a theory we take all the new technology with some of the most brilliant minds get a small little island and build a society if under 5 years recorded make it a reality show in real Time. Get ALL BANKS INVAL to handle any loses. Have human works and A.i directors… I always been a visionary I'm sure it will make universal history. 5000%

  2. stop trying to make it look like people are rich in china. Most of population is broke and buildings are empty. why all their markets are crashing. They busted their bankroll through the first upswing in the market now country is broke they cant' afford the stocks. they are close to going into a depression. You guys are 10 years to late on chinese stock market. You invest before the boom not after the boom…

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