Small cap will drive Chinese economy

Small cap companies in China are at the forefront of driving the country’s economic shift, according to Matthews Asia portfolio manager Tiffany Hsiao.

Small cap will drive Chinese economy

Hsiao explained that there is change as the country moves towards small cap companies in innovation, consumption and services.

While smaller companies in China are perceived by many to be a higher risk investment, Hsiao, who manages the firm’s China Small Companies Strategy, said historically this has not been the case.

“People always say small caps should be more volatile but actually they are not. The historical volatility of Chinese small caps has been far less than the overall Chinese equity universe and even the US small-cap universe.

“This is actually quite amazing because you can’t say the same for US and Europe.”

Hsiao said this is because small cap companies don’t rely on banks and their lending power. These small cap companies have no access to capital and therefore rely on their “own funding or from family and friends”.

“They grow at the rate that is sustainable and are self-funding so they are in a much better position to weather different economic cycles, and thus less volatile,” she added.

“They are even actually historically less volatile than European small caps so if you’re comfortable with the European small cap and that market volatility, then you should actually be very comfortable with the China small cap.”

Hsiao explained that Asia has made up the majority of the global growth over the past 10 years, and the contribution of China alone has been larger than Europe, US and Japan combined.

She said: “The three biggest markets in the world cannot deliver the growth of one country, China.

“That’s been the case for the past 10 years and we see the next ten years with a very similar structure and Asia providing the most growth.”

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