The Chinese economy is shifting gears, and investors, riding shotgun, need to brace for a few jolts.
China’s growth story to date has been fueled by manufacturing, exports, buying sovereign debt and sourcing commodities, according to analysts and academics who track Chinese trends closely.
But now, they agree, China is seguing from an industrial economy that builds and staffs factories and infrastructure to a consumer-based economy. That transition explains the slowdown in China’s growth rate — from an unsustainable near-10 percent at its peak to a mature-but-not-staid rate of 5 percent to 6 percent annually, analysts say.
In the U.S., about 70 percent of the gross domestic product is driven by consumers. In China, consumer spending accounts for about 40 percent of GDP, explains John Longo, finance professor at Rutgers University. “The losers are exporters of raw materials,” Longo says. “But the winners are U.S. companies that sell to the Chinese consumer.”
One major reason for the expected bumps is that China is moving from a planned, directed economy to an unpredictable, consumer-driven economy, says Atul Lele, chief investment officer with Deltec International Group, a Bahamas-based investment management group. That change requires a consumer financial infrastructure, which means consumer banks and services. And a consumer-driven economy requires consumers to — well, consume. “You need people to be comfortable consuming as well as saving,” Lele says.
Historically, this type of massive transition has never been smooth, he says. And at the moment, it’s occurring during a period of slower growth. “Keep an eye on the bigger picture. Don’t get thrown by short-term moves,” he says.
For investors looking at long-term trends, here are some to track:
E-commerce companies. Baidu, the Chinese equivalent of Google, and Alibaba, China’s equivalent of eBay combined with Amazon, have positioned the country’s vast middle market to shop online and get anything and everything delivered straight to their doorsteps. Analysts agree that the big-box retail model might not pan out in China, given that e-commerce companies have leapfrogged over the need for hub-and-spoke distribution.
Smartphones are the pivot point for e-commerce, which, analysts believe, will propel Apple sales for the foreseeable future.
Affordable luxury brands. Buick, Haagen-Dazs and Starbucks: Americans love these brands, and the emerging Chinese middle class does, too.
The insatiable appetite of well-off Chinese for luxury brands is well-documented, and they do account for a high proportion of luxury sales. But it’s the emerging middle class that will sustain sales for decades, analysts predict. Chinese consumers are very brand-conscious, and they are interested in brands that have cachet. “In China, if you’re drinking Starbucks coffee, you hold the cup so that others can see the logo,” Longo says.
Municipal bond system. A fragmented financial infrastructure has prevented some Chinese companies from borrowing, says Yu Zheng, portfolio manager at Matthews Asia, but the Chinese government is putting into place a municipal bond system that will effectively free up more capital for local business. That, Zheng says, will drive production in China for consumption in China, including services such as health care.
Problem-solving. “The Chinese economy is finally big enough to invest in solving its own problems — the need for better child nutrition, better food and organic products. China is investing in its own long-term well-being,” says Brian Buchwald, consumer intelligence specialist and CEO with data research firm Bomoda, based in New York.
If you want to be sure that your funds are well-positioned with China stocks, first know that Chinese companies are listed on any or all of three key exchanges: New York, Hong Kong and Shanghai, says Kevin Carter, founder of EMQQ, The Emerging Markets Internet & Ecommerce ETF, based in the San Francisco Bay Area.
Chinese companies list on the New York Stock Exchange to align with U.S. standards of liquidity and transparency, he points out. “As an investor, that’s good. You’d rather trade on something listed in New York,” he says. But those companies also tend to be excluded from indexes.
On the other hand, says Steve Sjuggerud, chief strategist with Stansberry Research, a Baltimore-based research firm, it’s also important to understand what’s going with the Shanghai and Hong Kong exchanges. For example, some funds, such as the large-cap iShares FTSE/Xinhua China 25 Index ETF, hold shares in Chinese companies that are traded both on the Shanghai and Hong Kong exchanges — indicating that those companies want the higher standard of accountability required by the Hong Kong exchange. One way to size up the inside of Chinese funds is by checking to see if they hold shares in the Forbes Global 2000, Sjuggerud recommends.
Experts agree that India is pulling even with China and may be poised for a growth spring. After all, it has nearly as many people, and fewer of them have cellphones. India’s infrastructure is a beat behind China’s, and that means it is likely to adopt e-commerce as its norm, says Peter Navarro, a business professor at the University of California–Irvine and director of the documentary “Death by China.”
“You definitely want to have an Asian component in your portfolio, and over time, there will be better places than China to park your money,” Navarro says. “When Vietnam gets more evolved and transparent, that will be a good market to be in.”
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How to Be a Bull in a China Slowdown originally appeared on usnews.com
