Technology regulation and the new consumer boom
The biggest theme in China excluding the new climate policy goals and the focus on social stability is that of technology regulation. It all started late last year with postponement of the Ant IPO (the fintech and payments arm of Alibaba) and subsequent antitrust investigation of Alibaba. The moves came following a negative speech by Alibaba co-founder Jack Ma of state-owned banks and a series of comments from Chinese regulators of the influence of technology giants such as Tencent, Alibaba, and Baidu, and their negative impact on consumer choice and lack of competition.
Since then, the rhetoric has worsened on Chinese technology companies with company forcing Baidu and Alibaba to spin out media assets and previous acquisitions are under scrutiny as well. Lately, the Chinese government has proposed a public-private joint venture on private user data to limit the power of technology giants which value is derived from user data. Yesterday, Tencent’s largest shareholder Prosus announced that it had reduced its stake from 31% to 29% in the second largest block trade in the history of equity markets, which could suggest investors are beginning to discount a lower earnings growth trajectory following the new technology regulation regime. The recent developments have created a valuation discount on large Chinese technology companies relative to US technology companies and the risk premium could continue to go up.
That is why we have included more traditional consumer companies in our basket as we believe this part of the private sector will be allowed to grow rapidly and under less scrutiny by the Chinese government because they rely less on private user data and thus do challenge the political power structure in China. The largest traditional consumer companies outside pure e-commerce on the list are Kweichow Moutai, Midea Group, Foshan Haitan, Xiaomi, BYD, KE Holdings, NIO, and ANTA Sports.
The China consumer and technology basket will likely experience high long-term growth above the global average and driven by an expanding middle class expected to reach the level seen in the EU by 2030. According to figures from Global Insight, the Chinese middle class defined by household income above $20,000 will rise to little more than 400mn by 2035 becoming the largest consumer market in the world. This is what you are betting on in this basket.
China’s domestic market will provide at least 15-20 years of runway for growth before internationalisation will be key to sustain growth and shareholder creation. A successful internalisation of Chinese brands will require a positive view of China in the future and thus this part of the growth story will depend very much on how the geopolitical landscape unfolds over time.
The obvious risks to this basket are a significant slowdown in growth which could come as a result of US-China trade frictions, low women fertility reduce population growth towards 2050, more technology regulation has we have outlined above, higher risk premium on Chinese equities to reflect increasing political oversight of the economy and the private sector.
Many of the stocks on the list are traded on exchange in mainland China and thus come with higher volatility and less liquidity than if they were listed on more mature exchanges. The companies also get the dominant part of their revenue in CNY and thus foreign investors are subject to currency translation risk in their own currency.
China has arguably been the biggest beneficiary of globalisation since the early 1980s and even more so after the inclusion in WTO in 2001. US and European backslash against a rising China could disrupt China’s wealth creation which is still predominantly driven by its export machine. Over time the domestic economy will take over as the economic driver, but in the meantime the escalating tensions between China and US/Europe pose a risk to China and its growth rate.