Navigating China’s economy

On 14th of September of 2015, Barron’s published a front-page story predicting the Chinese e-commerce giant Alibaba’s shares could tumble 50 per cent. By 23th of September this year, Alibaba’s shares jumped 72 per cent in value since the Barron’s story. Doomsayers have been left embarrassed, bruised and probably out of pocket as well.

The strong performances of companies like Alibaba and Tencent, a gaming and social media giant show the more resilient aspects of China’s slowing economy. Tencent now is the most valuable company in Asia, edging out telco giant China Mobile.

Since the spectacular stock crash and exchange rate gyration last year, international investors have become gloomy over the world’s second largest economy. Gone are the days when people think China will provide the steam to power the world’s economy. It is increasingly seen as the biggest risk for the global economy.

Indeed, the country is facing a myriad of challenges from vast and rapidly increasingly local government and corporate debts. Overcapacity in sectors from steel to cement has created hundreds of so-called Zombie firms that are essentially reliant on state-owned banking sector to survive. Investors are also getting nervous about the country’s fragile financial system.

However, despite these gloomy facts and trends, the world’s second largest economy is still chugging along at 6.7 per cent a year. This means they are still adding another 700 billion a year to its total GDP. It still remains the single largest source of global growth.

What has emerged over the last few years is the gradual fracturing of the economy and industries. Some provinces such as the rust-belt state of Northeast are essentially in recession and whereas prosperous Eastern provinces are still performing strongly.

Heavy industries and financial services sectors are buckling under pressure due to accumulation of bad loans as well as over-capacity. But at the same time, consumer goods and technology firms are profiting from the country’s strong growth in consumption as well as the transition to a more services-oriented economy.

For investors who are seeking to profit from China’s transition and its still growing economy, it is crucial to identify industries and sectors that will remain resilient under the current more sluggish environment. Broadly speaking, shares with exposure to the country’s consumer sector and technology are likely to do well in the future.

Lets take technology as an example; Chinese tech companies have been very successful in creating and transforming existing business models. In terms of mobile payment, it is in fact leading the world. Head of Microsoft Asia Research Institute says Chinese mobile payment companies are simply world class. Alipay is coming to Australia as well.

Despite China’s skewed economic structure that favours investment over consumption. Chinese consumption has been growing at the double digit for more than a decade, outpacing its GDP growth at the moment. Chinese middle class consumers are far more willing than their more conservative parents to spend on consumer goods.

Lets take the travel industry as an example. Since 2013, China has become the world’s largest outbound tourism market and the number of Chinese outbound tourists reached 120 million in 2015. This figure is expected to grow to 200 million in 2020.

This means travel related companies and aircraft makers will do very well out the country’s booming tourism industry. China has already overtaken New Zealand as Australia’s most important tourism customer. Boeing, estimates China will need 6810 new aircrafts in the next 20 years and the estimated value of these aircrafts is more than one trillion.

Cosmetic, clothing, entertainment and food companies are also expected to perform well as Chinese consumers open their wallets around the world. According to a recent report released by HSBC, it believes 12 Chinese and foreign companies are expected to profit from the consumer boom.

These companies include e-commerce giant Alibaba, internet engine search company Baidu, Spring Airlines, a budget carrier, tour operator CYTS, Kweichow Moutai, a famed Chinese liquour brand and movie chain Wanda Cinemas.

Yes, China is facing a lot of challenges at the moment. But its consumer class is doing a lot of heavy lifting. Investors who are betting on this trend can capitalize on the transformation of China’s economy.

Peter Cai is a research fellow in the East Asia program at the Lowy Institute for International Policy.

This article was produced in association with NABTrade. It is entirely the writer’s independent opinion and has not been influenced by any commercial relationship.