In our many travels through China to explore the changing market landscape, we’ve discovered countless companies and industries that are jumping ahead of the rest of the world. These leapfroggers are creating exciting opportunities for investors as China’s equity market opens to the world.
Global investors are starting to gain access to trillions of dollars’ worth of new securities in China. In June, index provider MSCI began to include domestic Chinese stocks, known as A-shares, in its emerging-market indices for the first time. Chinese authorities are adding capacity to trading programs that allow international investors to buy onshore stocks, which have an aggregate market cap of approximately US$7.0 trillion. For international investors, the appeal isn’t just about the sheer size of China’s market. The Chinese equity market adds significant diversification benefits to global funds. And Chinese companies are leading the way for global peers in industries ranging from e-commerce to advertising and electric cars to clean energy.
In our blog, China 2.0—From Imitation to Innovation, we discussed China’s evolution with respect to the consumer, environmental reforms, and technological innovation. Here we dive deeper into how China is leapfrogging the rest of the world in many of these areas. We also discuss how technology is impacting other important areas including education and healthcare.
Chinese Consumers Come Without the Baggage
Mobile trends are at the heart of China’s technological prowess. China’s landline telephony infrastructure never developed as much as that in the US or Europe. Yet mobile phone penetration in China has almost caught up with that in the West. Meanwhile, brick-and-mortar retail is very underdeveloped in China. This difference in infrastructure is the source of China’s edge.
For developed countries, the shift to e-commerce is often painful. It requires the retail sector to unwind huge networks of stores and strike the right balance between physical and digital sales. For China, it’s much easier, since companies don’t have to dismantle nearly as much physical store space to take the digital leap.
Instead of reconfiguring brick-and-mortar infrastructures, Chinese companies can spend their time building efficient e-commerce platforms designed for a digital world. Given the vast size of the market, this translates into massive consumer power. Alibaba reported annual gross merchandise value of US$768 billion in its fiscal year ending March 2018—more than three times greater than Amazon’s over the same period.
Mobile Payments Unchallenged
China’s e-commerce boom, is fueled, in part, by a payment revolution. Chinese consumers are far ahead of American and UK consumers in adopting mobile payment (Display).
China has 16.3 bank branches per 100,000 adults, compared with more than 32 in the US and almost 24 in Europe. Similarly, credit cards never made it into as many Chinese wallets. This explains why Chinese consumers have embraced mobile payments for everything from clothing to fast food.
Mobile payment is even popular among street vendors. For example, we’ve even seen fruit vendors on city streets with QR codes on their carts allowing payment through mobile payment systems.
Digital Advertising Is Booming
Similar trends are evolving in media consumption. In China, the rapid shift toward mobile devices has powered a digital advertising boom. About two-thirds of all advertising spend in China is dedicated to digital platforms, compared with 40% in the US.
Televisions are no longer the centerpiece of media consumption. Today, smartphones provide advertisers with mountains of data about consumers. Returns on advertising investments can be measured more directly. And new players, equipped with more accurate data, are disrupting the way advertisers reach consumers. Through its lead in digital advertising, China is at the forefront of using consumer data as a new currency.
Far from the front of the digital revolution, China is facing dire environmental challenges, as a result of its rapid industrialization. Until recently, these issues were not high on the country’s agenda.
That’s now changing. Since 2016, when the government signed the Paris climate accord, China has stepped up its efforts to shift its economy onto a more sustainable growth path. Dangerous levels of pollution in industrialized areas have prompted the government to act, and China’s middle class is growing increasingly intolerant.
Solar and wind power is still a relatively small piece of China’s energy market, but growth is rapidly accelerating. Against this backdrop, China has become a world leader in the production of solar panels. Many Chinese companies that have emerged to fulfill the country’s new appetite for clean technology and alternative energy are fast-growing, well-run operations, amply funded by both government and private sector investors.
Alongside the push for renewable energy, China has embarked upon an ambitious plan to promote electric vehicles (EVs). The government sees EVs as an important component of combating its energy security problem by helping to limit oil imports and reduce pollution.
In recent years, the government has spent billions of renminbi subsidizing EV purchases and chargers, while tightening regulation of traditional fossil-fuel-powered cars. China boasts the world’s largest maker of electric cars and EV batteries, and the auto industry includes companies that are seen as pioneers in research and development and in production of electric or partially electric vehicles.
Focusing Kids on Education
Chinese companies are also testing new technologies in bold ways, using distance learning to teach some of its students or experimenting with artificial intelligence technology in the classroom. Results from early tests suggest that these programs can keep kids more focused than real teachers. Education companies are also developing facial-recognition technologies to gauge the level of concentration of the students. If a student isn’t focused, parents will be automatically notified; gone are the days of staring out the window daydreaming!
Healthcare’s Getting into Shape
China lags the West in some areas. For example, the country’s healthcare system is still far behind the US and Europe. Yet reforms are under way that we believe will ultimately lead to major changes—and investing opportunities.
Market demand for healthcare in China is constantly growing (Display), owing to its large aging population. The government’s keynote reform plan—Healthy China 2030—represents a commitment to improve healthcare access and quality, raise life expectancy to 79, and support the expansion of the healthcare industry.
Regulatory changes are streamlining approval for new treatments, directly funding research and driving innovations in areas such as cancer treatment and the use of artificial intelligence to facilitate disease prevention, diagnosis, and patient engagement.
Think Strategically About China
From mobile technology to healthcare, China is reinventing itself—and redefining the world we live in. With innovative, technologically driven services and the largest domestic market in the world, many Chinese companies offer international investors a way to participate in China’s growth story, especially now that the onshore market is becoming more accessible.
Of course, there are significant risks to investing in China. Rising debt levels and trade tensions are growing concerns. Growth is slowing. But, headlines about China’s slowing growth miss the point. Even at a slower pace, real GDP growth in China is still about 6.8%—more than double the rate of global growth.
Staying on the sidelines can be costly. Investors who move into China’s markets today will find many new ways to profit from the explosive growth and innovation of the leapfroggers that are shaking up a wide range of global industries. We continue to actively monitor the evolving China investing landscape to uncover investing opportunities for our portfolios.
An information edge can mean the difference between getting ahead—or being left behind. That’s why many of our entrepreneurial clients look to us as a source of intellectual capital. For more insights on disruption, check out the related blogs here.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.