January 2020
Executive Summary
In the last year, headlines regarding the trade war, slowing GDP growth, Hong Kong protests and US-China decoupling have dominated the discussion. While we believe these issues continue to be on-going challenges in 2020, we believe it is equally important to focus on the fundamentals that generate growth and create investment opportunities in China. China continues to be a core market based on its overall growth rates, increasing middle-class domestic consumption, and the rise of its local companies “leap-frogging” to the latest generation technologies. Understanding these dynamics is key to identifying 2020 investment opportunities and China champions.
Slowing GDP growth but by far the largest growth market in the world 2020 is the final year of the government’s plan to double GDP between 2010 and 2020. The Chinese government aspires to maintain GDP growth rates of approximately 6% in 2020. Various organizations, including the World Bank and IMF have projected 2020 GDP growth rates between 5.8% to 6.0%. This is in absolute terms approximately US$820 billion, which is more than the forecasted 2020 GDP growth of the US, EU and Japan combined. As such, China remains the core growth market for many businesses and investors.
Domestic consumption by the middle class continues to drive growth
Growth in GDP in 2020 will continue to be powered by domestic consumption. This is driven by several factors including low unemployment rates of 3.8%, rising wages of over 13% per annum in the last 10 years and declining household savings rate at 23%. The Chinese consumer confidence index is high at 124 and this was reflected in the record-breaking sales of the recent Single’s Day. China’s online platforms generated a record high of US$58 billion in sales, more than double the US online sales of US$28 billion during the five-day period of Black Friday and Cyber Monday combined.
Chinese companies leapfrogging create investment opportunities
In recent years, Chinese companies have begun to “leapfrog” to the latest generation technology, and in many cases overtake global competition to set new industry standards. For example, local companies like Alibaba and Wechat have in a period of only five years, moved China from predominantly cash to smartphone payments, skipping the capital-intensive check and credit card infrastructure prevalent in other countries. This “leap-frogging” phenomenon has also played out in telecommunications, where China has avoided investing in costly fixed-line infrastructure and jumped directly to building mobile infrastructure and technology. This is beginning to happen with high-speed rail, electric vehicles and e-retailing. The next-generation technology is now being defined by Chinese companies in the areas of AI, robotics and big data.
Trade tensions thaw
China and the US have signed the Phase 1 trade deal on January 15th which has boosted investor confidence. In another sign of thawing tensions, both sides have agreed to resume semi-annual talks on economic and trade issues. These talks will be held in addition to the Phase 2 trade negotiations. Moreover, the US Treasury Department has removed the label of “currency manipulator” from China just days before signing the Phase 1 trade deal.
Nonetheless, many of the existing tariffs imposed by the US last year on Chinese goods remain in place. Some multinationals have already shifted production from China to South-East Asia, particularly in lower-end manufacturing. However, many of these moves began years ago prior to the trade war in response to rising labor costs in China. It is unlikely that large global players will exit China en-masse. Some may hedge and begin diversifying their supply chain, which is a long and costly process. Other companies like Tesla have doubled-down on China, citing it as their core growth market.
Qilin focus on attractive growth industries
The ACATIS QILIN Marco Polo Asia fund, that we designed and launched with ACATIS invests in growth and value opportunities in China and Asia. In 2020, we are focused on select opportunities in technology, consumer products, pharmaceuticals, education, travel and EV.