Asia Tea Time - Cup 30 ☕

This week I talk about the China state investment fund, investing in dividend stocks, and retail investors in South Korea.

Macro in Asia

China state investment fund buys more shares in “Big Four” banks

China’s state investment fund, Central Hujin Investment, bought more Shanghai-traded shares of the “Big Four” banks in China earlier this week.

Central Hujin is already the parent of the four big state-owned banks and plans to continue to buy shares in the coming months to revive confidence in the country’s slumping stock market.

Why it’s happening

• This is pretty much par for the course in China. If the local stock market suffers, then the central government likes to step in and buy shares of bigger firms to support sentiment.

• The government has form in this area. Back in 2015, when the Chinese stock market saw a massive bubble burst, a “National Team” was set up by the government to buy up shares of locally-listed firms.

Why it matters

• China’s onshore stock market – which lists stocks typically referred to as “A shares” – has seen its benchmark index (CSI300) fall around 6% so far in 2023. The CSI300 recently traded at an 11-month low. 

• China’s economy is struggling with deflation (basically falling prices) as consumers save money and put off spending.

• That’s been mainly caused by a loss of confidence in the country’s massive property market, with big developers like Country Garden and Evergrande running into trouble.

What’s next?

• There have been murmurs of a “stock market stabilisation” fund being set up by the authorities to further help with flagging sentiment in the stock market. However, most investors should be watching for any “big-bang” or bazooka stimulus measures coming out of Beijing.

Tim’s Take 

• China’s own predicament with its economy today is often compared to that of Japan in the late 1980s, when its huge property and stock market bubble burst.

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However, the “National Team” setup (when talking about its stock market) is uniquely Chinese and is focused on shoring up confidence in a stock market that is dominated by retail investors.

In 2015, when the Shanghai market crashed 40% in basically three months, the government stepped in – through various entitites – to buy shares en masse.

However, it’s all done in a very opaque manner so when numbers are put out there on how much the “National Team” is actually buying up, they’re just rough estimates by analysts.

Either way, the Chinese government already owns a huge swathe of the Chinese economy and what companies are state-owned or truly “private” is nowadays a blurry distinction. 

• With sentiment so negative right now on China stocks, perhaps the government felt it was time to wade in and support prices for its biggest banks, which are the lifeblood of its economy. 

Tim’s money tip of the week

I’ve written previously about not focusing on just the dividend yield when investing for income. But I also hear an argument that the US stock market is “just for capital appreciation”.

That’s mainly due to foreigners having to pay a 30% dividend withholding tax for dividends paid by US companies. Say a company pays out a dividend of $1, that means you only get 70 cents of that in your pocket.

When you compare that to a zero-rate dividend tax in Singapore or Hong Kong, it totally makes sense – at first glance – to buy all your dividend stocks in Asia.

BUT I feel that’s a mistaken mindset. First off, if you’re young and buying dividend stocks for income, you’re most likely going to hold them for the long term – think 10, 20 or even 30 years.

So, the key to what you want to see with dividend stocks you hold? Uninterrupted, fast dividend growth over long stretches of time. Unfortunately, in Singapore and Hong Kong, that is extremely hard to find.

Real estate investment trusts (REITs) are required by law to pay out 90% of profits as dividends, meaning that if there’s a slight fall in profitability, there isn’t much of a buffer for the dividend paid to you as a shareholder.

We’ve seen that play out for all REITs globally in the past few years. Some banks in Singapore can provide this consistency but overall, the US has the largest choice of strong dividend growers.

Many strong dividend growth companies in the US have been able to grow their dividend per share (DPS) at annualised rates of 15-20% for a decade or longer.

Over the long haul, say 10-20 years, that will easily negate any withholding tax impact you may feel as a dividend investor. Think of the withholding tax as a “fee” to access some of the world’s most promising dividend companies.

At the end of the day, it’s really a case of delayed gratification. You give up the higher yield and potentially higher payout today for a more robust income stream in the future.

Story of the week

While meme stocks took the world by storm a few years ago before fizzling out – remember GameStop? – it seems like younger Koreans didn’t get the memo. 

It appears that many retail investors in South Korea have bet big on themes like EV battery materials, quantum computers and superconductors.

The Kosdaq (think of it as the Nasdaq of Korea) has gained around 20% so far in 2023 versus the 8% gain for the broader Kospi Index.

With “margin calls” a distinct possibility, as investors take on more leverage, this particular meme stock craze is likely to end in tears.