These days, conventional wisdom is fixated on China's GDP figure, with heated debate over the so-called hard-landing scenario. I don't think that there will be a hard landing or any other type of landing of the Chinese economy, which, if likened to a space shuttle, may be cruising at the Stratosphere -- one layer beneath Mesosphere -- but still above Troposphere, cooler in temperature, but not in free-fall. Here are my arguments.
This round of China's slowdown has been self-initiated and enforced internally. External factors, such as the European credit crisis, have complicated China's efforts aimed at more balanced growth. On concerns about the potentially dire consequences of super-stimulus introduced during the global financial crisis in 2008-09, Chinese policy makers had been trying to reverse those policies and ring-fence problems during the past 24 months. The Chinese central bank has raised benchmark interest rates five times since 2010 and introduced harsh regulatory policies, preventing commercial banks from financing local government projects. The property market has been closely scrutinized and disciplined with measures such as purchase limits in major cities. Those efforts stand in sharp contrast to what other major economies have been pursuing of late -- they have invented acronyms such as QE, TARP, and LTRO, which are beyond Main Street's comprehension. Faced with the increasing challenges to global economic growth, China should be better positioned to rejuvenate growth vs. other economies, which are running out gunpowder. The worse the European situation becomes, the more likely it is that China will deploy accommodative tools, and do so sooner. The most recent manifestation of that accommodation is that the Chinese central bank has been cutting reserve requirement ratios consecutively, and the fact that the government reinstated the subsidy program on its citizens' purchase of home appliances. Investors may frown on China's centralized decision-making on critical policies, but it works in a more impactful way, and more effectively, during a period of crisis.
The Chinese economic system is running below its optimal long-term potential, despite the achievements of the past two decades. The mind-boggling headlines of recent years that China accounts for 70% of global commodities consumption, that Chinese tourists are on a global luxury shopping spree, of iconic buildings mushrooming in Shanghai -- all belie the fact that China is still a relatively low-income developing country where GDP per capita ($8,382) is way below that of Mexico ($14,610) or even Jamaica ($9,029). While the infrastructure of China's coastal provinces has well been established, inland provinces are still underdeveloped, with many places reminiscent of Africa. The upward convergence of growth in those underdeveloped areas will continue to contribute to China's construction momentum.
Urbanization always comes hand in hand with infrastructure development in China. If strictly defined, China currently has an urbanization ratio of 51%, or 690 million city dwellers out of 1.34 billion people. The Chinese government's 10-year objective is to achieve an urbanization ratio of 70% (260 million additional urban dwellers). Economics theory tells us that marginal propensity to consume is always higher among people who are upgrading their lifestyles from a low level via rising disposable income. With a gigantic consumer base of two or three times the size that of the U.S. emerging within a decade, it doesn't take too much brainpower to gauge the potential and related investment opportunities there.
The amazing growth in China in the past two decades has been achieved despite one-party rule, which is characterized by a powerful state grip, arbitrary intervention and deficiencies of freedom. Cries for accelerated institutional reforms go louder every day. The pragmatism of the early years, "regardless of the cat's color, any cat that catches a mouse is a good cat," elevated China out of an ideological Middle Age, and embraced material pursuits. From this point, further institutional restructuring and transformation will become the next tailwind to deliver growth with quality. On the wish list: downsizing state-owned enterprises, liberalizing the financial industry, encouraging private investment, and allowing more freedom of speech (which encourages innovation and entrepreneurship).
Legendary Hockey player Wayne Gretzky once said, "I skate to where the puck is going to be, not where it has been." So where is the China puck going to be?
I believe Chinese consumers will become a very powerful growth engine for China, and will impact other major economies. There are several investment strategies for jumping onto the Chinese consumer bandwagon:
Direct Investing Or Investing Through The Back Door
Clients can always access local consumer names via H-share, local A-share, or US ADRs. They may also seek those well-managed U.S. or European consumer names whose earnings growth has been driven by Chinese purchasing, such as YUM, LVMH, Swatch, Volkswagen, Adidas and even pharmaceutical companies such as Novo Nordisk. YUM is opening restaurant franchises at a speed of two stores per business day. Corporate governance and financial disclosures are considerations that favor the latter strategy.
Stick To Highly Scalable Platforms/Business Models
The Internet is a fantastic invention for society in that it democratizes the information search and sharing process. This is particularly meaningful for consumers. Super efficient price search capability not only removes price discrepancies but also spurs consumption. Outside the U.S., China has the largest number of publicly listed Internet companies with diversified business models, such as Baidu (search), Sina and Tencent (social networking services), Alibaba (e-commerce), Netease (online gaming), Yoku (online video), Ctrip (online travelling), and Qihoo (antivirus software), all of which serve hundreds of millions of consumers in China.
The Chinese Consumption Boom
The Chinese consumption boom will be accompanied by credit expansion, so services related to credit provision, payment processing, and settlement are worthy of close attention. The investable universe is comprised of both dedicated consumer financing firms and credit card and online payment providers.
Lei Wang is co-portfolio manager of the Thornburg International Value Fund (TGVAX), distributed by Thornburg Securities Corporation. For additional information, including a prospectus, please visit www.thornburg.com.