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Investing in China – The key themes (PART1)
  • Over the past few decades, China has grown into a global economic giant that cannot be ignored by the world’s governments and investors alike. Since the 1980s, the country’s share of the world’s gross domestic product (GDP) has increased nearly ten-fold and it now accounts for around a fifth of the global output.

    Yet it is no secret that China’s dizzying GDP growth has been slowing for some time as it transitions to a more sustainable growth model, focused on domestic consumption.

    The last 10 years have seen a great deal of progress in making this economic shift. This has been underpinned by the emergence and growth of the middle-class consumer, a trend that is expected to continue. In fact, between 2010 and 2018, the percentage of the population with annual household disposable incomes of RMB138,000 (£15,225) or more has risen from just 8% to 49%.

    As China moves further into the Year of the Rat, which in Chinese astrology symbolises prosperity and financial wellbeing, its economic growth is expected to slow to 5.8% in 2020, but the quality of this growth is set to continue improving.

    Going places

    This economic shift is driving continued urbanisation, technological innovation and the growth of the middle class, which are creating investment opportunities in the so-called “new China” areas of the economy, such as healthcare, IT and consumer. The changing spending habits of the Chinese consumer are boosting growth in such industries as e-commerce and travel. For example, this year the number of outbound trips from Mainland China is expected to increase to 200 million, more than ten times the number at the beginning of the decade.

    In 2018, Chinese tourists already leapfrogged the US in terms of the amount of money they spent overseas, dishing out some $277.3bn compared to just $144.2bn by US tourists.

    However, just 13% of Chinese citizens own a passport, compared to around 40% of Americans and 76% of Britons.

    So the potential for growth in the travel industry is huge. The China Outbound Tourism Research Institute predicts the number of outbound trips from China will double to 400 million by 2030.

    One of the stocks in the Fidelity China Special Situations trust that benefits from this theme is Chinese online travel agency Trip.com, one of the largest travel companies in the world which also owns the Skyscanner brand, among others. In 2018, the group reported net revenues of $4.5bn, up 15% on the previous year.

    Purchasing power

    Similarly, as China’s disposable incomes grow, the country is outpacing the US as the largest retail market in the world, and a high proportion of these sales are coming from e-commerce. In fact, some 35.3% of China’s retail sales now occur online, by far the highest rate in the world.

    The trust plays this theme through technology giants Alibaba and Tencent, two of its largest holdings. Alibaba, for example, was bought in 2012 ahead of its IPO in 2014, which turned out to be the largest in global history. In those two years, the size of the trust’s holding in the company grew nearly five-fold. In the subsequent years since IPO, Alibaba has become the biggest e-commerce platform in the world, with online sales and profits surpassing all US retailers (including Walmart, Amazon and eBay) combined.

    However, despite the already strong growth in this area, e-commerce in China is expected to continue on its upward path, while rival US becomes a smaller part of the market. Research by eMarketer predicts that by 2022, China will have a 63% share of the global online retail sales market, up from 55.8% in 2019, while the US share will drop to just 15%.

    Another company that is taking advantage of this theme is 21vianet, one of China’s largest independent operators of internet data centres. The firm is the exclusive operator of Microsoft Azure and Office 365 in China, and also houses data centres for industry leaders such as IBM.

    Although Chinese businesses have been slow to adopt cloud technologies, this is set to change, according to research from McKinsey, with the Chinese Ministry of Industry and Information Technology pushing for reform in this area and businesses ready to evolve.

    China’s cloud computing market is expected to reach RMB300bn (£33bn) by 2023, more than three times its size in 2018, with 60% of domestic companies and government agencies set to be using cloud computing services.

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