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China: New blooms and Reasons for OptimismMay 2019« back to listing

China: New blooms and Reasons for Optimism

Although the past 12 months have served up much negative press, we shouldn’t write China off just yet, says Richard Field

There has been much recent coverage on China and its travails as it lurched into 2019 with a bump. Some reports have suggested that the economy is slowing and that investors might be spooked as a result. Yet, a broader inspection reveals new blooms of growth appearing, indicating that those talking up the demise of the Chinese market may be jumping the gun a little.

Of course, China remains a nation of great extremes. At 3.7m square miles it is the fourth largest country on the planet with a population of around 1.4bn people – or around 39 times the size of the UK. And although China is roughly the size of the United States, historically there have been stark differences between the two both in terms of population and output.

Yet, while the US retains its title of the world’s largest economy, China has made great strides since economic reforms began in 1978 (expanding by a factor of 30 in real terms) and now sits at number two. Furthermore, data from the IMF indicates China’s GDP – the monetary value of all the finished goods and services produced within a country's borders – will reach $15.5 trillion by the end of next year, with the US set to top $22.3 trillion.

Reasons to be optimistic

So, what does that tell us if we look at the respective GDPs between 2006 and 2020? Pre-2006 the gap between the two was increasing, but more recently the same IMF numbers reveal an incremental GDP of $12.7 trillion for China with $8.5 trillion for the US. In short, the gap is closing.

Why is this important? Well, even though China recently announced that its official economic growth had slowed to 6.6 percent last year, the slowest pace since 1990, there are some definite reasons to be optimistic.

Both industrial output and retail sales figures in December 2018 grew by 5.7% and 8.2% respectively, beating economists expectations for industry whilst matching forecasts for retail. So, in the midst of an ongoing Trump-led trade war with the US, wider reports suggest the service sector also strengthened during the last quarter.

Meanwhile, although monthly growth figures for retail sales have been slowing, quarterly spending, including travel and education, is on the rise. So too is a wider appreciation that the country must look to adjust its thinking to assure long term growth in the future. Part of that has seen the structure of its output improving somewhat, with consumption growing as a share of GDP as investment and exports continue to slide.

Consumers a key driver of growth

What is clear is that for the foreseeable future consumers remain a key driver of China’s domestic growth and that will be important as it navigates choppier waters during 2019. Recent figures from Mckinsey reveal as much, confirming that consumers accounted for almost 80 percent of GDP growth during the first nine months of the past year. At the same time the average Chinese disposable income was up by over 8 percent, giving consumers a timely boost that the government looks set to top up with sizeable tax cuts that could see the median household saving the equivalent of another year’s pay.

These kind of figures alongside a resilient urban job market mean that Chinese families have every reason to feel positive about the rest of the year ahead. Yes, there may be more considered and careful spending in some quarters than in the past, but there will clearly be strong growth for certain products. Take L’Oreal for instance. A higher demand for premium cosmetics saw the cosmetics brand post a 33 percent rise in turnover in China during 2018.

China loves ‘athleisure’

Those same billion or so consumers have also boosted the profits of China’s largest sportswear brand, Anta Sports, by more than 33 percent as the leisure behemoth’s revenue increased by 44 percent and eclipsed Rmb24.1bn. Furthermore, the thirty year-old firm has just concluded a €5.6bn takeover of Finland’s Amer Sports, owners of Wilson tennis racquets and Salomon, as it attempts to take on the likes of Adidas and Nike on a more global scale.

Just two years ago, the market for sportswear in China had already surpassed ¥212bn ($31.4bn), again putting it just behind the US as the second-largest sportswear market in the world. However, figures from Euromonitor suggest it’s about to go one better, by overtaking the market for luxury goods in terms of total value during the coming year.

“Turns out the China market loves their athleisure,” confirmed Ron Gross on a recent edition of The Motley Fool podcast.

Gross was referring to sportswear producer Lululemon’s fourth quarter revenue report, which revealed revenues of $1.2bn, up 25 percent on the same quarter in the last year.

Such brands are taking advantage of the Chinese government’s appetite for sport ahead of the 2022 Winter Olympics in Beijing. That and a rapidly increasing number of sporting events attempting to quench the thirst of its growing number of 400m millennials.

Wanda Group’s $650m investment in World Triathlon Corp and associated Ironman series of events three years back brought a whole new craze to the country and a recent guideline report from the General Administration of Sport of China suggests that by 2020, around 1,900 marathon races will attract around 10m runners annually, with the distance-running industry generating revenues of 120bn yuan ($19bn) from sales of running gear, training, broadcasting, endorsement and tourism.

Add those to a country that already has some 300m people playing basketball, according to recent NBA figures and its easy to see why there should be scope for even wider growth as China attempts to deliver on its promise of building more than 900,000 stadiums and gyms within six years. This in a country where not so long ago exercise tended to mean early morning tai chi in the park!

The westernisation of Chinese consumers

Such rapid changes and continued government backing should also provide plenty of opportunities for growth in new areas as Chinese consumers begin to replicate the habits of their western counterparts on a massive scale. We’ve already seen this as these now social media savvy millennials begin to think more expansively around their social lives and free time, spending less on high value luxury products and more on athleisure and associated dietary supplements such as protein bars and yoghurt drinks. At the same time they’re adapting a café culture that is fuelling investment in new areas such as ‘Tea Bars’ serving tea macchiatos (made using a blend of flavoured Chinese tea with a fluffy, creamy top of whipped cream and cream cheese).

Of course, old habits die-hard and Moutai’s recent declaration that net profits were up by 30 percent on last year for the first three months of 2019 tells its own story. Chinese consumers won’t be giving up baijiu any time soon.