Tripling of China’s urban areas by 2020 to underpin consumption-led recovery

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William Fong, manager of the Baring China Select Fund and director of Asian Equities, this urbanisation of China will catalyse a switch to a more consumption-driven economic model, driving investment opportunities in sectors such as healthcare, automotives, technology, home appliances and consumer goods.

China’s economic recovery will be driven by a significant acceleration in urban building and the development of new cities, according to Baring Asset Management (“Barings”). This urbanisation of China will catalyse a switch to a more consumption-driven economic model, driving investment opportunities in sectors such as healthcare, automotives, technology, home appliances and consumer goods.

It is predicted that China will be home to around 150 urban areas in 2020, up from the current 50, supported by major infrastructure and building programmes: for instance, it is estimated that 36 million affordable housing units will be built in China across 2011-2015 as part of the government’s 12th Five Year Plan. Such a substantial level of urban development will feed into the wider economy, believes Barings, with a commensurate upswing in demand for a range of goods and services. The penetration of cars in China in 2013 was 78 vehicles per 1,000 people, notes Barings, compared to around 170 in Brazil, 300 in Russia and 800 in the United States.

William Fong, Manager of the Baring China Select Fund and Director of Asian Equities, said: “It is clear that China’s economy is set for continued urban and social development, which we believe will be one of the key drivers of strong growth over the next decade. Key data points in China suggest that the best investment opportunities are ahead of us, particularly in light of the highly significant reforms being rolled out by the Chinese government to open up the mainland economy – and corporations – to a global investor base.

“There are lots of great companies producing high quality goods and we firmly believe that China remains very undervalued compared to other key global markets. We are seeing the establishment of ‘global’ Chinese companies and brands, and this bodes well for the full integration of China into the world economy.”

E-commerce is a sector set to benefit from the ongoing urbanisation and rise of the middle class segment in China, with the penetration rate of e-commerce in the country as a percentage of sales forecast to be higher than the US by the end of 2015. Search engine Baidu, labelled the ‘Google of China’ with an 80% market share of search, is one company that will benefit significantly, forecasts Barings, while computer manufacturer Lenovo – dubbed China’s ‘Apple’ – is seen as well positioned not just in China but increasingly in other markets.

Economic indicators also point to a more positive investment environment in China, believes Barings. Inflation is under control – supported by low global energy prices – affording the Chinese authorities greater flexibility in the tools they can use to stimulate the economy. Export growth is looking positive, and a more cost conscious sentiment at state-owned Chinese firms is helping drive an uplift in corporate earnings.

William Fong said: “The macroeconomic backdrop is much better for investors, bolstered by a reform-led government focused on tangible and systemic improvements.

“The recent launch of the Stock Connect initiative between the Hong Kong and Shanghai exchanges should be seen as a major development by Chinese authorities, and fully complements the quota system under the expanding RQFII scheme. We would expect that, if Stock Connect proves to be a success, then similar programmes will be developed in asset classes other than equities such as fixed income and commodities.”

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