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Key Features Driving Sustainability of the “new” China Economy: Part 2

In part 1 of this article, we discussed how China’s economy is undergoing a transition. While the old China economy was largely driven by manufacturing led and export oriented, the new China economy is driven more by domestic consumption. We will now discuss some of the key features of the “new” China economy that are likely to drive its sustainability, benefitting long-term China investors.

 

SLOWER GROWTH BUT STILL ONE OF THE FASTEST GROWING ECONOMIES IN THE WORLD

In spite of its slower growth China remains one of the fastest growing economies in the world, with a forecasted growth rate of 6.5% in 2017 and 6% in 2018. On a global scale, the country represents 15% of the world’s economy but accounts for close to 25-30% of global economic growth[1]. It is inevitable that growth will be slower in an economy of this size. Just think of the growth rate in developed countries like Canada and the US which is about one-third the rate of China. In reality, the Chinese economy is simply rebalancing towards sustainable domestically driven growth, and not necessarily slowing down.

 

MASSIVE INFRASTRUCTURE AND TECHNOLOGY PLATFORMS DRIVING PRODUCTIVITY GAINS

China has spent trillions of dollars on building best-in-class infrastructure, including high-speed railway systems, highways, innovative hi-tech and telecommunication networks, and low carbon energy generation. These investments have created a solid foundation for significant productivity improvements over the long-term. For example, there are nearly 600 million smart phone users in China or approximately 30% of the 2 billion smart phone users globally[2]. This development has been the driving force behind the rapid proliferation of e-commerce and mobile gaming.

 

HIGHLY EDUCATED PEOPLE WITH AN ENTREPRENEURIAL DRIVE

The Chinese have a long tradition of placing a high value in education. Each year, about 6.8 million students graduate from universities, with approximately 700,000 becoming engineers[3], enhancing the quality of the workforce and contributing to increased productivity.

This trend is complemented by a growing inflow of overseas Chinese professionals returning home, bringing back valuable overseas experience to many industries in China.

Concurrently, growing entrepreneurship is demonstrated by young Chinese graduates who are an integral part of more than 60 million small and medium enterprises which employ 70% of the workforce and are the primary drivers of economic growth. These entrepreneurs are supported by China’s rapidly evolving capital markets which provide them with access to financing.

 

GROWING MIDDLE CLASS FUELS CONSUMPTION

China’s growing middle class will support increasing consumer demand and growing infrastructure spending which are favorable for economic growth and domestic equities. The middle class in China is expected to be roughly four times the size of the middle class in the US in 2030. China should have approximately 1.4 billion middle class consumers by 2030 compared to 365 million in the US and 414 million in Western Europe[4]. Currently, China’s middle class is larger than the entire population of the US[5].

 

“NEW” CHINA EMERGES, “OLD” CHINA EVOLVES

Chinese companies are becoming more innovative, entrepreneurial and globally-focused. Many traditional “old” economy industries are being reformed, leading to the creation of “new” companies at both the state and national levels.

Initiatives such as the One Belt, One Road are bringing domestic Chinese companies into the global picture as pillars of global growth. State-owned enterprises are becoming more and more focused on the needs of international investors and are reorienting and integrating themselves as major players in the global economy. 

 

GLOBAL LEADERS ESTABLISH THEIR PRESENCE

Several Chinese companies have established a global presence, which makes them a great investment opportunity. These companies epitomize the growth of secular trends in China.

Among the leading companies that have emerged are TenCent, Alibaba, and AIA. TenCent is the largest gaming company in the world, which has also created the social platform WeChat, a US$270 billion company[6] that has 889 million[7] users worldwide. The platform essentially combines all facets of daily life, such as banking, social, eatery, news, etc into one central app. Alibaba, referred to as the Amazon of Asia, is the largest retailer with $463 billion gross merchandise value, displacing Walmart to the second place. AIA, a spinoff from the AIG group, is a leading insurance provider in a country that is underpenetrated in insurance products.

With boots on the ground, through China AMC, one of the largest asset managers in China, the actively-managed Excel China fund is uniquely positioned to leverage growth opportunities in the country for the benefit of its clients.

 

[1] China's Only 15% Of The Global Economy But Contributes 25 - 30% Of Global Growth, Forbes, Oct 30, 2016

[2] Statista.com accessed on March 31, 2017

[3] Ministry of Education of the People’s Republic of China, Education Statistics for 2015

[4] UN Population Division and Goldman Sachs as cited in Forbes, September 5, 2011: Within a generation, China Middle class four times larger than America’s

[5] CNN Money, April 26, 2012

[6] Bloomberg accessed on March 31, 2017  

[7] Statista.com accessed on March 31, 2017

 

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The information contained in this article is for informational and illustrative purposes only and is not intended to provide specific financial, investment, or other advice to you, and should not be acted or relied upon in that regard without seeking the advice of a professional. Particular investments or trading strategies should be evaluated relative to each individual.

Views expressed regarding a particular company, security, industry or market sector are the views of only that speaker or author as of the time expressed and do not necessarily represent the views of Excel. Any such views are subject to change at any time based upon markets and other conditions. Excel disclaims any responsibility to update such views. These views are not a recommendation to buy or sell and may not be relied on as investment advice and, because investment decisions for mutual funds are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any such fund.

Speculation or stated beliefs about future events, such as market and economic conditions, company or security performance, upcoming product offerings or other projections are “forward-looking statements.” These forward-looking statements represent the beliefs of the speaker or author and do not necessarily represent the views of Excel. General business, market, economic and political conditions could cause actual results to differ materially from what the speaker or author presently anticipates or projects.

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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