Name: Fortune Global Forum 2023: China’s Next Phase Of Growth
Uploaded: 2023-11-29
Duration: 20 min 23 s
Description: Laura Cha, Chairman, Hong Kong Exchanges and Clearing Joey Wat, Chief Executive Officer, Yum China In conversation with: Clay Chandler, FORTUNE

Laura Cha, Chairman, Hong Kong Exchanges and Clearing Joey Wat, Chief Executive Officer, Yum China In conversation with: Clay Chandler, FORTUNE

Fortune Global Forum 2023: China’s Next Phase Of Growth 

Conferences

All right, we're going to get ready now for the for the next session after decades of GDP growth above 9% a year. The world's second largest economy is finding itself amidst a flurry of unexpected challenges. China's economy is in some ways faltering due to fact that include many things, a real estate crisis, declining consumer confidence as well. There's an aging population factor, the knock on effects of the zero COVID policy as well and a decrease in trade and foreign investment. So, so many challenges for that economy and the idea, you'll remember by some economists that China would surpass the United States to become the world's leading economy is now in question in a way that it wasn't maybe a few years ago. Um And, and this is a concern for the global economy because will this have a knock on effect for everyone else? We are going to hear from business leaders today who operate inside of China on what they are doing to manage these economic headwinds and what they're doing uh to stay resilient as well. And we'll listen for insights that they can offer all of you international executives on the best ways of doing business in China right now. Uh both uh rank on this year's list of fortune's most powerful women in business. They are Laura Cha. She's the Chairman of Hong Kong Exchanges and clearing a powerhouse in the world of Financial Exchanges that operates an extensive portfolio of markets, equities, commodities and currencies. Joey Watt is chief executive of Yum China and of note, Yum China ranks on fortune 2023 change of the world list, which looks at companies that have achieved measurable, sustainable social impact as part of their profit making activities. Laura and Joey Joey join Fortunes Clay Chandler. Please welcome them, please. Thank you. Thanks. He um I have been looking forward to this uh panel uh all day. These really are two amazing power women and uh we feel very fortunate to have them with us in our strategy session about China this morning, we talked a little bit about some of the challenges that ha I just mentioned, but we also spend a little bit of time talking about investor sentiment and how fickle it can be. We noted the boom and bust and global investment sentiment about China this year. And uh for those of you that don't know, I mean, in January, we saw a huge run up in investment uh in China stocks and bonds as people expected that the Chinese economy would come roaring back from the pandemic that there would be a lot of pent up consumer demand. And uh that's not really how things played out what happened instead was that we had a gradual recovery. We had a lot of positive expression of uh kind of economic policy and, and a kind of pro market uh uh changes from uh China's planners and policymakers, but investors weren't really convinced. And uh so, uh you know, 10 months or so into uh into the year, a lot of that investment money that, that piled in has uh has just exited China stocks and bonds again. And so I think there's a little bit of a question which I want to us today about why that is, is it that China's economy is weak and faltering? Is it that investor perceptions are overly bullish or is it, is it some combination of the two? Um and I want to start Joey maybe with you because you're right on the front lines of this. Um Yum China is a fantastic company. It operates uh KFC and Pizza Hut and Taco Bell and other fast food brands. It has one of China's largest networks of stores. You've got, I think about 9000. Is that right? KF CS? We are celebrating 10,000 KFC December 15th. That's next month. Yeah. And 14,000 plus stores altogether in something like almost 2000 Chinese cities. Yeah. So you've really got your finger on the pulse of, of Chinese consumption and consumers. You're right there on the front lines but this year has been an interesting one for you because you had a pretty good year last year, given that the COVID restrictions were still in place. And this year your profits and your revenues are, are up. You added something like six or 700 stores this year I saw. So you're, you're definitely growing and expanding. Uh And then I, I just noticed in the third quarter, yyy, you know, you said, well, sales were not, were a little softer than you thought that they would be and your stock price dropped 15% in a single day and it's now down to about 20% I think uh uh year to date. Uh And so I hope you can explain that a little bit. Um Is it that consumer sentiment is weak or is it that investor sentiment is weak? What's going on? Maybe a little bit of both? Um Well, you know, China went through three year, it was tough in whatever way, including uh you know, consideration for the consumer. So it just takes a little bit more time. Um Not to forget during three years. Uh people don't get much sort of subsidies in financial terms from so not like the United States. So in the process, we can understand people become rather cautious and rational with the spending and you learn to live your life without much luxury for three years. Um So, you know, as a result, the consumer behavior, I will call it become more rational in terms of their spending, uh which we can understand. Uh But at the same time, some pattern change, for example, over the weekend people stay at home more. Um because, you know, they're still coming out particularly for older people. So that's, that's one thing happening. At the same time, the expectation is very different because um for, for people outside China, the open up happened much earlier. Um you know, November 14 means nothing to most people in the world, but means the world to people in China. That's the first day China opened up in Hebei. And last year right now in Shanghai, we were still in time. It's not that long, but the expectation is that everything honky dory. So there's a bit of mismatch and as a result, I would say that's a bit of um perception or understanding still take a bit of time to, to uh you know, to just to let it happen and then come back to my company as an example because I can't really comment on the whole economy. I only can, can look at economy from chicken, selling fried chicken. So, so um at the best I call it chicken, economic or economic. Um so from selling fried chicken, uh what happened is we report, well, actually, it's reported by multiple media that uh quarter three, last quarter, we ourselves grew by 9% in reporting currency. But in reality, we grew ourselves by 15% in Renminbi. But because of currency, that's mismatch and that 6% make a break in terms of meeting expectation or not. But the headline misunderstanding, which is a term that they used this morning, I think it's brilliant way to describe. There's a lot of headline misunderstanding. People just look at the headline without going into the detail. That's one thing sort of happening everywhere. Um And then the Chinese economy is growing at whatever number you call it 4% 5% let's say assuming is growing at 5%. What does that mean? China economy is at 1718 trillion right now, 5% means 800 to 900 billion. What does that mean? It means two Vietnam a year. So in in absolute terms, so as a business operator myself, when we are opening stores in in China, why do I have to go that far? I mean, it's happening right here. And by the way, what bring it all together is while there's still so much opportunity for consumer product industry, the economy years is growing only at three or 4 5% whatever number is restaurant industry we've been growing at double digit, high, double digit this year. And as a result in reality, we achieve record sales, record profit this year. Um And in terms of new store opening, actually, this year, we're gonna smash about 14,000 stores. So we at the end of today, after today I have a few more stores in our portfolio. That's the speed that we are talking about. And we are not the only ones in our industry, the big M and then many other brands in shoes, in electronic, they're all expanding very aggressively. So while on the one hand, you have the perception or misperception, whatever call it. On the other hand, people are voting still with the money with the wallets. You know, this is really fascinating and it does sort of speak to this question of whether perhaps what there is, is a, is a kind of misperception on the part of global uh uh investors. I mean, it strikes me that your sector in particular and where you're positioned in the market, investors should be looking a little bit more sophisticated in a more sophisticated way at the types of different companies. I mean, maybe luxury companies are, are are struggling or having a harder time, maybe the housing sector is struggling. But you're in a that, you know, even during a time when people are thinking more carefully about how they spend their money, um you know, uh you might actually benefit from that kind of uh uh uh you know, people maybe are not going to a fancy super expensive restaurant but they're happy to go to a KFC or, or a pizza hut. Yeah, that that's happening. But at the same time, Chinese consumers are becoming more rational in the sense that they want the price but also good product, not just one, they want both and we have to continue to and we are in that position, but also we work very hard for it. It does not just happen that way for three years pandemic, we deliver profit over 12 quarters nonstop. Um And I, I truly believe that whatever industry we are or whatever sector, what define a company is not only where you are but what, what have we done in the last few years? And I truly believe all the great company are the Children of the long term. Huh? Great companies that Children in the long winter. Ok, then. Oh, I wanna come back to that. It's a really interesting uh uh sentiment. Laura, let's turn to you for a moment. I mean, the the the Conduit for a lot of this investment, a big conduit has been the Hong Kong Exchange. And uh one of the things that really impresses me about the exchange is how um uh aggressively you've worked to expand the Connect program and to make it easier for global investors, to invest in, in China stocks and to make it easier for Chinese investors to invest in global stocks. Um Talk to us a little bit about connect because maybe people here may not be familiar with it and how it's how it's expanded over the last few years. Yeah. Thank you, Clay. Um the Connect program, what we call the Hong Kong Shanghai connect and the Hong Kong Sump connect uh our flagship product in terms of connecting China with the world and Shanghai. Uh Hong Kong connect was set up in 2014. So it's been now 89 years and it's been proven extremely successful. What the program is is that investors retail investors on the Chinese domestic market, they have investor accounts, they can buy Hong Kong shares through this mechanism and then the same for Hong Kong investors, they can buy a shares on the Chinese Exchange without having to go through the the process. So if you are in the Connect program, uh you have actually been able Chinese investor in international and Hong Kong company and vice versa. And then we expanded it to uh the Sum Exchange as well. This year, we have a breakthrough in the sense that international companies that are that have a primary listing in Hong Kong will be admitted into that Connect program. That means for example, a Middle East com companies if they come to list in Hong Kong, not only are you able to assess the Hong Kong investors and global investors but also the Chinese investors, the Chinese retail market uh in the stock market has 206 million accounts. So you know those are real name accounts. There's not, you know they they're not allowing a fake names. So there's a huge pool of capital that can be accessible by foreign investors. So this is a very important aspect and you know, China has the highest saving rate in the world. So we calculated that not just we but the public data is that uh they are untapped capital of $30 trillion in the population of China. They are looking for a way to go out to invest in good companies. And Hong Kong is the perfect conduit. And now you know, we are not only in terms of equity, but we also have bond connect, swap connect, which is a derivative ETF connect. So we are expanding that, that, that that portfolio offering so that investors can take advantage of this very unique uh program in Hong Kong. So you know, you can go both ways the capital. So not just the opportunities for the number of ways that uh investors can invest in uh in equities but also uh bonds debt now and then the different ways that they can invest in equities uh which is, which is extremely sophisticated. I mean, I cover the and, and watch the exchange pretty closely. It's, it's one of the most sophisticated financial operations in the world. And it's been quite entrepreneurial in finding ways to uh you know, put itself at the center uh of these two markets that have in many ways, different economic uh systems. Um I wonder if you could talk a little bit about uh the, the the geopolitics of that because you know Hong Kong's strength has always been that it is this connector. It's got a kind of foot in one market. It's got a foot in the west and that's always, you know, been. It's, it's, it's genius and its virtue um that becomes a very tricky position to be in the little though when the two biggest economies in the world are suddenly uh uh at loggerheads as increasingly they seem to, to be. Um are you finding uh you know that people are reluctant to come and trade in Hong Kong to do business in Hong Kong? That that's somehow inhibiting Hong Kong's ability to fulfill its its mission as being this unique uh connector when when uh geopolitical tensions are the way they are, I think um the geopolitical tension affects everyone and affects a lot of markets. And Hong Kong is no exception in exchange, as you said, we are in the center of it. But if we step back and look at the two factors, one is what has made Hong Kong great as an international center. You know, we have those factors have not changed. For example, the transparency, the rule of law, low tax regime, a you know, a a large pool of professionals um and where our rules are clear and transparent, we have no administrative interference in the market. These are the factors that have given investor confidence to invest in our market, global investors to come, none of that has changed. And then we look at the other side which you know, ok, the China factors China as someone has said earlier, it is the second largest economy in the world, 80 trillion $18 trillion us dollars of GDP, which is four times that of Japan, six times of India, six times of ASEAN country and 10 times of South Korea. So it is also the largest trading partner of 100 and 40 countries in the world. So these factors, yes, they are affected by geopolitical tension now and there, here and there and to some degree more, some degree less. But these are the hard factors that you cannot ignore. So China plays a very important role going forward and going forward in the global economic scenario. So we have to look at those factors are also in the long term, they haven't changed. So if you look at the two fundamentals, they change Hong Kong on one side and China's supply, those are what will keep on keep us growing. But we're not only looking at China, we have been in this part of the world a few times this year already. We are um looking to diversify our investor base, our source of capital, our po possibility of listed um issuer. So we are also trying to be as international as we can to keep that um navigate, as we say, we have to navigate very carefully in these circumstances. We've got just a couple of minutes left. I want, maybe just with one minute for each of you ask, you know, come back to Joey's observation that, that strong Children are the survivors of, of, uh, long cold winters. So, we're in a little bit of a winter period right now. Uh, I'd love you to both kind of look forward a little bit and give me your quick take on. How long, how much longer do you think winter lasts? Um, I don't know, nor does it matter. Um As long as we stay agile, it's winter or summer, whatever weather will do. Well, um in the short term might be challenging. Uh But here's the final number for, for my optimism we can see in China for 36 years, we have only served about one third of total Chinese population only. And right now, 10,000 stores in China. What does that mean? KFC Global have 29,000 store in 150 countries and 10,000 is in China. That's where the the the the growth has been and it will be continue and not to mention the brand as well. So we can't afford to ignore a market of that size under any circumstances. Laura, what's your, what's your view? I think for the capital market as a whole and for Hong Kong, in particular for Hong Kong exchange, the area of growth that we see coming out of China, uh the green economy and the digital economy um in sustainable finance and sustainability. You know, in terms of decarbonization, China is really leading the way in terms of wind, renewable, etcetera. And the next thing will be the improvement, enhancement of those technologies to make renewable much more accessible. And China has been doing that more than many other countries. The ev number, the electrical vehicle, the batteries and the wind turbine and the solar uh solar uh panel. Uh they are the top producer in the world. What we need next is breakthrough to make it more accessible, cheaper for the entire population and outside. And then the other thing is the digital economy. We see the innovation there that's driving and the green economy plus the digital economy itself at 5% to the GDP growth. So we see very strongly. The trend coming is, you know, technology A I um sustainable finance, etcetera. These are the driver and that will look to new capital and Hong Kong could be the place to help raise them. Fascinating. Um I'm afraid that's all the time we have, but thank you so much for your views uh on the world's second largest economy and Hong Kong's role in facilitating its continued growth. Uh Please uh join me in giving a warm welcome to our, our uh our panelists. Thank you very much.