Macquarie: The truth about China

Britney Lam, investment strategist at Macquarie Asian Listed Equities argues that  understanding how China intends to transition to the consumption led economy should help investors navigate the risks, and potentially even profit from them.

We expect that China will avoid (or at least attempt to avoid) a systemic crisis by injecting enormous amounts of liquidity through unconventional policy tools.

The crux of China’s get-out-of-jail free card lies with stimulating the household consumer to spend, and borrow. If growth is to be driven by the consumer, rates need to be kept low to ensure cheap liquidity and avoid a potential financial crisis. Pension reforms and superannuation schemes are in their infancy in China. Maturing this part of the economy is likely to provide comfort to consumers about social security and encourage higher spending now.

We believe that stimulating the consumer is the central government’s most sensible option, and consequently favour investment linked to the consumer sector, where we see growth potential and a number of opportunities.

The largest beneficiaries in services (local products) in Asia won’t be in high end luxury goods. Rather we prefer middle class goods and services, including food businesses, airports, duty free, hospitals, department stores with tax-rebates, tour guide operators, overseas education providers, cosmetics, hotels and resorts, and lifestyle brands. No longer is consumer growth the domain of the very wealthy, or high end luxury brands. Now it is the low to middle income bracket that experiences wage growth at levels above GDP growth.

We like the ‘average’ person and outbound travel. Chinese tourism is growing from a very low base, with only 4 per cent of the population (55 million) owning a passport, compared to 35 per cent of Americans and 25 per cent of Japanese. This is expected to triple to 150 million by 2025.

These numbers are already remarkable, but it is estimated that 28 per cent of China’s middle class can now afford to travel, which means the ten year outlook is even more encouraging. It is estimated that by 2025, total outbound travel numbers from China will be 220 million, equivalent to more than USD 450bn annually. That’s more than the entire GDP of Finland or Denmark.

We are confident the central government’s policy reform will enable a successful transition to consumer and services led growth. While we expect continued volatility and acknowledge the risks inherent in China’s economy, we believe there are selective opportunities over the long term if a disciplined and risk-focus investment approach is applied.

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