Two thousand and fifteen. Those were dark days. The oil price plunged more than 30%, sending our country into recession, and the S&P/TSX Composite dropped 11%, making our market amongst the world’s worst performing. One of the main causes: concern over a China slowdown. While these China fears briefly persisted into 2016, they quickly dissipated. Despite the usual hysterical predictions, China’s economic growth actually barely slowed and it certainly didn’t grind the global economy to a halt as many expected. You might recall Royal Bank of Scotland in January 2016 saying that 2016 would be a “cataclysmic year” with stock markets falling by up to 20% and oil falling to US$16/barrel with China being a key cause. Oops.
China, once again, proved more resilient than many strategists and economists imagined.
Naturally, China is volatile, as are all emerging markets, but its economy is still strong and, we believe, poses little danger to the global economy or to long-term investors. (Yeah, I might eat my words, but that’s what we get paid to do: put it out there.)
The bullish China argument is well established, but it bears repeating. The Chinese want all the ridiculous stuff that Westerners want: big screen TVs, state-of-the-art smartphones, 18-year-old Scotches, Porsches (if Ryan can have one, why shouldn’t your average Chinese consumer?), fancy threads, newly built homes and so on. And the root cause of this new materialism is the country’s rapid transition from an agricultural and rural economy to an industrial and urban one.
Nobel laureate Simon Kuznets noted that a Chinese worker who moves from the farm to the city increases his or her contribution to the economy fivefold. And the average salary of a Chinese urban worker is currently about three times that of a rural worker, so you can see the appeal of making the move to the big city. Carl Weinberg of Barron’s also notes that:
Last year, China moved 17 million people from farms to cities, a pace that has varied by 12 million to 22 million per year over the past decades. With 590 million people remaining in rural areas, plenty of scope remains for this migration to continue—and surely there are enough 15- to 30-year-olds to move, despite the one-child-policy experiment. Demographic dividends can and will support modernization.
China’s also a confident country. Credit Suisse each year conducts an exhaustive emerging markets consumer survey and the results of its most recent one are supportive of our positive view. Given higher job security, a low unemployment rate and stable income growth, Chinese consumers are willing to spend:
Overall, consumers are spending more on big ticket items and services such as education, cars, property and mobile phones…. It is clear that, as consumers become wealthier, they want to upgrade their lifestyles and spending on more large ticket items that have longer life spans versus the traditional fast-moving consumer goods with a low ticket size. The above behavior change is supported by higher income as well as the expectation of higher household income in the next 12 months.
This consumer confidence is important as the Chinese keep around 30% of their income in savings, so if they become more willing to spend, these funds will begin to filter into the economy. The Chinese are also young and, like it or not, young workers are more productive than older workers. Young, populous, confident, increasingly urban and with money coming off the sidelines—talk about the ideal scenario for supporting robust long-term economic growth.
China Mobile Customer Baes (Millions): Rapidly Connecting its 4G Network in 2013.
Source: China Mobile (CM officially launched its 4G network in 2013)
And how will this sidelined money filter into the economy? Much of it will come via technology investment and adoption. Credit Suisse, for example, predicts China’s online sales will grow by more than 20% y-o-y in 2017–2018, accounting for 15–20% of China’s total retail sales in 2017 (up from 10% in 2014). We also know that China has rapidly adopted wireless technology, but equally important, it’s becoming increasingly connected to the most advanced wireless platform—4G. China Mobile, for example, the country’s largest telecom company, currently has 559 million customers on its 4G network—a staggering 521% increase over 2014 levels. Reportedly, China has adopted 4G at a faster rate than both Japan and the US; two of the world’s most advanced countries. This bodes well for China’s adoption of 5G, which will be the standard in the coming decade. 5G is an ultra-reliable and powerful network that can handle such demanding applications as the ‘Internet of things’ and self-driving cars. More sophisticated connectivity is a sure sign of a healthy economy.
Now, there’s clearly an issue of trust when it comes to China. No one, for instance, believes its data is transparent. However, next week Ryan will highlight the Chinese economic numbers that are the most difficult to fudge, and therefore the most reliable and valid. These are the numbers that we rely on and they paint a pretty attractive picture also.
So, it’s a collaborative look at China. Ryan and I do talk, in case you were wondering—we’re not just two Porsches passing in the night.