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All-consuming China

Hyomi Jie

Hyomi Jie - Portfolio Manager, Fidelity China Consumer Fund

The opportunity to invest in how and what China consumes is significant and continues to impact a broad range of companies beyond traditional consumer sectors. What’s more, this theme - powered by the twin drivers of urbanisation and a rising middle class - still offers a long runway of growth.

All-consuming China

It is particularly important to recognise that although China has more than 160 cities with a population of over one million people, its overall urbanisation rate is still relatively low at 60%. This compares to 80% in the likes of the US and the UK.

These figures are expected to converge over the next 20 years as more and more Chinese people move to cities. Part of this is simply due to aspirations - the allure of higher quality jobs and access to a better education - and it is encouraging that the government remains committed to introducing policies to make it easier for Chinese people to move to cities.

Opportunities across the consumer spectrum

At the same time, we are seeing the relationship between the consumer and technology progress at an incredible rate. In China, the innovation of mobile technology, interaction with consumers and mobile payments already surpasses the West and if anything, we can expect this to accelerate as the 5G network rolls out over the next couple of years.

This backdrop is creating opportunities to invest in those companies that are at the forefront of these shifts. For example, fashion retailer JNBY is a company benefiting from higher-end spending of China’s urbanites, while effectively using social media and technology to bring its brand to consumers. As a JNBY customer myself, I receive interactive magazine-type advertising via WeChat that is very influential in making me want to buy something else from the company.

In addition to more aspirational purchases of items like clothing and smartphones, we are also seeing greater value being placed on education, especially due to a highly competitive jobs market. Spending on education is relatively insulated from the broader macro environment as it is an expense many parents are naturally reluctant to cut back on, even in an economic downturn.

In this space, the portfolio holds New Oriental Education which is one of the largest tutoring companies in China with around 6.3 million total student enrolments in 2018. The company has a significant footprint with over 1,081 learning centres in 75 cities, but it is also effectively utilising technology to deliver online tools for students.

Assessing the headwinds

While the long-term case for investing in China’s consumption story remains compelling, there are near-term risks that need to be acknowledged and monitored in the form of rising debt levels and of course US-China trade tensions.

The bigger picture is that China as a whole is highly indebted, with combined household, government and corporate debt running at over two-and-a-half times gross domestic product (GDP). The positive is that Chinese policymakers are aware of this issue and the government is leading a change of the debt structure, through things like opening-up the bond market and clamping down on shadow banking. So, whilst the amount of debt looks scary, the quality of debt is reasonable and improving.

On the issue of trade, I think the underlying tensions that we’ve seen surface between the US and China are very likely here to stay for the time being. The heart of the issue is that China is closing the gap with the US to be the world’s most powerful economy, so the threat of tariffs by President Trump will likely continue as a negotiating tool to challenge China’s growing international influence and its government support for globally strategic industries.

The uncertainty brought about from this ongoing trade dispute is likely to impact consumer sentiment. Heightened economic uncertainty, lack of clarity over which companies and the degree of impact and stock market volatility all serve to dampen consumer enthusiasm. However, the Chinese government is responding via accommodative fiscal policies to boost domestic spending.

There is a very good chance that future consumer spending finds its way to the leading local brands at the expense of US brands due to a mix of nationalism and cost advantages. I remain interested in companies with a strong domestic brand, cultural heritage, technology innovation and a competitive cost base. Fundamental research and bottom-up stock picking come to the fore at times like this.

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