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Taking the Long View

10 Questions with Richard Gao, Manager of Matthews China MCHFX, Matthews China Small Companies MCSMX, and Matthews Pacific Tiger MAPTX; comanager of Matthews China Dividend MCDFX.

Morningstar Advisor, 11/30/2011

1. It’s been a tough year for China investors. What lessons have you learned this year?
We have always been focused on long-term fundamentals and the long-term outlook for the economy. We usually do not look at the short-term issues, such as quarterly GDP growth or quarterly earnings. There have been some headwinds in the near term for the macro economy, but if you look at the long-term potential of China, we still quite strongly believe that China’s domestic economy is going to be a big driver in the future.

2. Where does real estate in China stand? Is there a bubble?
I wouldn’t call it a bubble, but I do see some overheating in parts of the country. In the so-called “first tier” cities—Beijing, Shanghai, and the coastal cities—especially in the luxury residential apartments in those big cities. But if you look at the overall country, there is still quite-solid demand and healthy development in the smaller cities.

3. s there a story in the Chinese markets that’s being overlooked by Western investors?
We need to look at broader and longer-term trends. Western media and Western investors sometimes focus on the short-term negative side of the economy or company fundamentals. If you take a longer-term time horizon, I see a lot of good fundamental improvements going forward.

4. Your career started in 1989 with the Bank of China. Would the younger you recognize today’s Chinese markets?
There’s been quite a lot of development in such a short time. In 1991, China started its first stock exchange, and now China has become the second-largest stock market in the world in terms of capitalization. It’s been growing very fast.

5. Do you find better governance among Chinese companies that pay dividends?
I think it’s definitely a good indicator if a company pays consistent dividends. Dividend-paying companies tend to be much better in terms of management quality and the consistency of their business model and growth.

6. What’s your biggest concern about China going forward?
In the near term, there are definitely some headwinds. Right now, inflation is still one of the top priorities for the government to deal with. Although the inflation rate has been coming down during recent months, it is still quite high, at 6.1% CPI growth. Also, we realize that there will be a lot of challenges in the property and banking sectors.

7. Outside of China, what Asian countries are you excited about right now?
We’re looking at countries that have been relying more and more on domestic consumption growth. In countries like Indonesia, India, and Thailand, the economies are more resilient and rely more on domestic consumption. Relatively speaking, the slowdown in the global economy has less impact on those economies.

8. Are there frontier markets in Asia that you see making the leap to emerging markets anytime soon?
I think in the longer term, there are definitely opportunities for countries like Vietnam and Sri Lanka. Right now, they are still in a transitional period.

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