Keeping a Finger on China’s Pulse
Charlene Bian, Managing Director of the China Strategy Group at Moody’s Analytics, discusses the uses of data and analytics in evaluating changes in China policy
Bio: Charlene Bian is the Managing Director of the China Strategy Group at Moody’s Analytics. She has held various positions in Moody’s Analytics’ New York, Hong Kong and Shenzhen offices including Chief of Staff for the President of Moody’s Analytics, as well as head of business for the APAC risk and finance analytics group.
Investing in the China market has always involved a greater level of risk compared to the more established Western markets. But the spectacular growth of the country’s economy, particularly over the past two decades, has continuously provided ample reward for those willing to take the plunge. Today, China’s market seems more tumultuous than ever to those outside of the country, but despite the perception of increased risk, the benefits of the market are still there.
Moody’s Analytics, a subsidiary of Moody’s Corporation, supports the development of China’s domestic markets and global economic role through data, analytics and insights. For example, through the products and services offered by Moody’s Analytics an investor outside of China can access information on bond issuers, a bank can evaluate the credit risk profile of a small business owner, or a car manufacturer can understand its climate risk exposure stemming from its manufacturing processes and supply chain management.
In this interview, Charlene Bian, Managing Director of the China Strategy Group at Moody’s Analytics, looks at the benefits of data and analytics in risk management, how to understand China’s approach to policy and avoid falling foul of any changes, and the need for investors to pursue more dynamic portfolios.
Q. The China market poses a unique set of challenges for businesses and investors. What are the advantages and disadvantages of being in the China market?
A. For me, the advantages and disadvantages are the same: scale. At the risk of stating the obvious, the size of China’s economy, the population and the landmass are all notable. What comes with scale is diversity. There are variations in the way of thinking, the parameters for doing business, and how decisions are made. It’s difficult, if not impossible, to try to directly apply what you learn elsewhere in the world to your China business. It’s sometimes difficult to apply the experience from one city or region to other parts of China. So scale can be a drawback.
At the same time, it can provide huge benefits. But to gain the advantages from it you need to be here, breathing the air and seeing how people make a living. That will help you visualize and internalize the diversity and draw commonalities that are much needed for businesses to achieve scale. But if one underestimates the nuances introduced by the diversity, it will be dangerously convenient to conclude that China is an unsolvable enigma.
Q. There are an increasing number of data protection laws being put in place both in China and around the world. Given the importance of data to investment decision-making and risk management, how will these new laws and regulations affect investors in China?
A. My view is that it’s probably going to affect investors outside a little bit more because the data cannot leave the country as easily. In general, it makes competition harder as people will be less likely to share data, and the value of data will likely increase as well.
At the same time, there are opportunities for those who are good with data. You’re more often forced to leverage data that’s publicly available to make decisions. Can you dig deeper? Can you make the connections between data? Can you see things others don’t? Can you, most importantly, relay all that in your business decision-making? I don’t think we lack data these days, what we lack are credible insights.
Q. One of the ways in which China differs from the Western model is a different approach to laws and regulations and the degree of transparency when it comes to changes. In the past, investors were able to offset this “China risk” with the potential for major profit from a fast-growing economy. How does this equation look in the future?
A. Since the outbreak of COVID-19, investors around the world have seen a significant rise in policy uncertainty. But I think it’s not always unpredictable. I see people and institutions in China effectively make decisions from new policies and other information the government releases to the public. One can understand how policy works in China as a different way of thinking. It’s a new language that can be learned and translated.
As a company, we recently created an interesting tool which uses machine learning and natural language processing to pick up keywords from news articles or other publicly available sources, then tag and classify them into risk categories. Basically, if you read a certain keyword in an article, we want to be able to understand what it means in terms of credit events and what early warning signs we should take from it.
Q. Businesses, particularly in China, are digitalizing rapidly. To what extent are new trends such as Big Data, AI and SaaS shaping the way investors behave in the China market? And how can investors in other markets learn from this?
A. It varies by industry. For example, B2B and B2C are very different. The B2C industries are definitely at the leading edge—the almost cashless society we have in China is a good example. The B2B industries are catching up, but still have a lot of work to do in terms of digitalization, and a lot to learn. As consumers, we’re going to hold the same high standards when we buy enterprise software as when we buy groceries. Therefore, I think it’s fair to say there is a pressure upon the B2B providers.
There’s also a similar amount of catching up and a lot of imagination required for external international investors to enter the country. Investors, particularly those in the China market, are very good at balancing experience with analytics. Balancing what you might call instinct with science, and heart with brain. One could argue there are perhaps more qualitative factors in the China market to consider than in some other markets, so it is highly impressive that they can channel the qualitative with the quantitative. It’s certainly something to learn from.
Q. How should investors, portfolio managers and asset managers approach risk management in China and how does this differ from other established markets?
A. Although progress is being made when it comes to leveraging data and analytics for decision support, I think leaders still need to embrace them a little bit more. I also think it’s important to recognize and understand the limitations of the models, even the best ones. It is also important to triangulate the decision-making process from as many information sources as you can find, and then combine this with your own theory of how things work. This is especially true for the capital markets here because there are so many qualitative and quantitative factors that it’s impossible to just use one source or a single model.
We also need to do more testing of hypotheses. The market here is still growing and shaping into its own rhythm compared to more established markets. The effort of understanding how this market functions is also an evolving process. Having a set of tools and analytical frameworks is as important as having people with experience in handling challenges.
Q. What can help business leaders make decisions with more confidence in this time of increasing uncertainties
A. I’m a strong believer in models working for people, not the other way around. I have had the privilege of engaging with a lot of institutions in China, other APAC and Europe countries, and the Americas. The successful institutions that I see are very good at making data analytics tools work for their people, making their lives easier. Meanwhile, I’ve also seen practitioners laboring themselves to collect data and generate reports day and night, for very little in return.
For business leaders, it is useful to periodically look at three things. The first is whether your teams have the right tools and analytics to understand your assets and liabilities, as well as the risk and opportunities associated with them at full scale. This means no blind spots, always staying at the frontline of technology, and having an up-to-date understanding of the full picture.
Secondly, ask yourself how useful these tools are—when we acquire or develop something, it may only be useful for the time being. With the pace of how things evolve these days, we need to look at our tools more often, particularly when we are using them for decision-making.
The third is whether you have the policies, processes and systems that will support all of this. Be it escalation rules, data quality checks and workflow automation. These things are not rocket science, but important basics that if not done right, will render a lot of decisions less useful or with unintended consequences.
Q. How do you expect the risk management landscape in China to change in the coming five to ten years? Where are the key opportunities and challenges to be found?
A. There are two areas of opportunity. Institutions have been spending time looking at individual investments and they have become very good at it. But portfolio management is still often an afterthought and an area that can unlock huge value. The China market will shape your portfolio with natural concentrations. Are these concentrations well compensated? Portfolio management can help you better balance risk and return, and do more with less.
The other aspect is thinking about asset and liability dynamics in an integrated way. This is particularly important for firms that have much more complex liabilities, in addition to dynamic assets. Take insurance firms for example, if the investment strategies are too conservative, then you lose out on potential uptake. It also limits how you design your products and how you compete in the market. But, if you’re too aggressive, then chances are the stakes are too high when it comes to risk management and its potential impact on revenue and liquidity.
Over the next ten years, those who are better at making effective decisions in dynamic market conditions will likely be the ones staying ahead of the curve.
Interview by Patrick Body
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