I forgot who said that he loved humanity – it was the people he couldn’t stand. I feel the same way about non-Japan Asia outside of China. I like their markets, except I can’t find any individual stocks that I like. Country ETFs are available for every Asian economy of any size, including Pakistan, but they don’t necessarily represent the best way to get exposure to Asian growth.

The character of the next wave of economic growth is incompatible with the existing market capitalization of most emerging markets: badly-run banks, mediocre telecommunications companies, comprador trading companies and retro retailers. The new Chinese model typified by firms like Alibaba and Huawei will add a great deal of value, but not necessarily to existing names.

The biggest beneficiary of Vietnamese growth might be Foxconn, the assembly company that began shifting some operations to Vietnam early this year in order to avoid prospective US tariffs on goods assembled in China.

Of course, local companies can benefit too. After China, Vietnam was Asia’s best performer, year to date, with a 15% gain in the Ho Chi Minh Equity Index. Two-fifths of the gain in terms of market capitalization came from two real estate firms, Vingroup and Vinhomes.

In a globalized world, the profits generated by booming economies might be booked in different countries.

China is the outstanding performer among Asian stock markets, not because its economic growth prospects are so much better than its neighbors, but rather because the individual stocks that matter the most have better prospects. China’s financial market is opening to the world. It will host the world’s largest bond market.

Seven out of ten of the top contributors to index gains were financials (see The Alpha Shift in Chinese Financials, February 28). The others were Tencent, China Mobile and China Tower. The last two will benefit from China’s 5G rollout and associated infrastructure boom.

Contrast China’s performance to Taiwan, where financials gained 4% to date. That’s the performance of flagship semiconductor fabricator Taiwan Semiconductor, and also the performance of Taiwanese financials, which comprise 20% of the index. The shrinkage in world trade and disruption of supply chains due to the Trump tariff war were not kind to the valuations of semiconductor stocks generally. Overall Taiwan’s information technology sector rose 7.4%, but index performance was lower due to losses in trade-dependent sectors such as shipping.

Financials comprise 40% of the market capitalization of Indonesia, 35% of Malaysia, and 28% of Philippines, and financials in all three countries are flat for the year.

The outperformance of China’s financial sector portends a disruptive change, a shift from a state-owned financial sector that poured subsidized credit into state-owned enterprises to a market-based system where publicly-traded corporate bonds impose market discipline on corporate managers.

China has the highest personal savings rate of all the world’s major economies and the most inefficient allocation of these savings. A January report in China Daily provided some remarkable data:

“The average total assets of urban households reached 1.5 million yuan ($221,000) per family in 2017, up by a compound annual growth rate of 7.6 percent from 970,000 yuan in 2011. The figure is expected to have increased to 1.62 million yuan in 2018, according to a report jointly issued by China Guangfa Bank Co Ltd and Southwestern University of Finance and Economics.

“The report was based on a survey on nearly 10,000 urban households with an average annual family income exceeding 67,817 yuan in 23 cities across China.

“Housing assets took a large part, or 77.7 percent, of the total wealth of China’s urban households in 2017, whereas financial assets only accounted for 11.8 percent, the report said.

“The proportion of financial assets to total assets for urban households in China was much lower than that of families in many developed economies, such as Japan (61.1 percent), Singapore (56 percent), and the United Kingdom (52.2 percent), the report said.

“There was also imbalance in the allocation of the households’ financial assets, of which 42.9 percent were bank deposits, compared with wealth management products (13.4 percent), equities (8.1 percent), funds (3.2 percent) and bonds (0.7 percent).”

As Chinese households diversify from real estate into financial instruments and shift from cash into equities and bonds, the profitability of its financial services sector will rise commensurately. Competition from foreign firms who now can establish wholly-owned subsidiaries in China will compel Chinese firms to maintain high standards and reduce costs.

That’s a structural change that makes sense of China’s outperformance. It isn’t about GDP, but about the profitability of individual firms. That’s what is missing in the stock markets of most of Asia.