Maarten-Jan Bakkum, Senior Strategist, Emerging Markets at NN Investment Partners
In 2015, China was seen as the biggest risk to the world economy. Two years later, this is completely reversed. China has managed to maintain growth, while economic imbalances are being reduced. In particular, rapid consumption growth through e-commerce channels has made China one of the best-performing emerging markets of 2017. The risk premiums on Chinese assets have fallen sharply as a result of the policy focus on debt reduction and productivity-enhancing reforms.
It has to be said that the Chinese authorities have effectively taken back control, which they seemed to lose in 2015. In that year, the combination of falling growth and rapidly increasing debt quotas led to an alarming flight of capital. In the last few months of 2015, China tightened its capital controls and launched an ambitious reform program for state-owned enterprises. On the one hand it became much harder for companies and individuals to move capital out of China, but on the other hand the underlying causes of the capital flight were seriously addressed. After only a few quarters sentiment began to improve. In particular, China’s efforts to reduce overcapacity and curb the rapid debt accumulation in its loss-making state-owned enterprises have paid off. Profitability in the state sector started to improve, which quickly reduced dependence on new debt. Capital outflows fell sharply, the pressure on the currency disappeared and confidence began to recover.
Meanwhile, the improving housing market and strong world trade growth made sure that China’s growth slowdown was tempered. Market fears that China could go from 7% to 4% growth within a number of years turned out to be unrealistic. There is now a widespread confidence among economists and investors that Chinese growth will remain above 6% in the coming years. Consumption through e-commerce has now become the main growth theme. Thanks to continued strong income and urbanization growth and declining income inequality (since the 2008 crisis), the share of consumption in the economy continues to increase compared to investments. This share is now over 50% and consumption has become the most important driver of investment growth (for decades, the export sector used to be the main growth driver). The Chinese government is doing everything in its power to facilitate consumption growth, especially through e-commerce. Regulation has been relaxed and infrastructure investments are mainly aimed at improving the transport of goods between and within the cities.
The result of it all is that Chinese consumption growth has become one of the most exciting investment themes. This is particularly evident in the spectacular performance of the main internet and e-commerce shares. Growth prospects in this sector are certainly good, and perhaps they are not even fully discounted in current prices. This trend is highly relevant for the rest of the emerging world. In the past, commodity producing countries were the main beneficiaries of the Chinese construction boom. Now it is mainly the Asian electronics and consumer goods manufacturers that benefit from the Chinese consumption boom.