With over five thousand years of history and a population of nearly 1.4 billion, everything about China is massive. China was shrouded in isolation for most of the 20th century, and just 40 years ago reopened its borders to the world.
Re-Introducing the Red Dragon
Since then, this country, whose original name means “Middle Kingdom,” has chugged along on a never-before-seen fast track to economic and social development. China now enjoys its largest sphere of influence in centuries, and the world has begun to adjust accordingly.
If it was not there already, China has now been forced onto the radar of Americans across the country through concerns about a trade war that has no immediate end in sight. But outside of these developments, many are still unfamiliar with the world’s second-largest power.
In this special report on China, we will introduce investors to the latest developments in the nation’s economy, business climate, international activity, military power, and cultural influence. We will also highlight Chinese companies that are well-positioned to capitalize on trends in each of these respective areas.
The Path to Exponential Economic Growth
China’s unprecedented growth began in 1978, when then-leader Deng Xiaoping initiated his now famous economic reforms. The policy resulted in the decollectivizing of agriculture, a stronger entrepreneurial environment, as well as the opening of China to foreign trade and investment. These initiatives are what breathed life into the Chinese economy, and put it on the path to become what it is today.
There have been a few hiccups along the way, but for the most part China hasn’t looked back since the reforms were first initiated. According to data from the World Bank, China’s GDP was $12.24 trillion in 2017, or about 82 times larger than it was in 1978. Moreover, IMF projections have the nation reaching $14.1 trillion in GDP in 2018, and $21.58 trillion by 2023.
The booming Chinese economy has brought hundreds of millions out of poverty, and given rise to the largest middle-class population in the world. As investors can surely imagine, this has broad and deeply consequential implications.
The Most Influential Consumers of the 21st Century
Homi Kharas at the Brookings Institute wrote an update to his initial report on the “unprecedented expansion of the global middle class” in February of last year. Here are some very interesting data points that Kharas and the Brookings team gathered:
- By the end of 2016, 3.2 billion people around the world were in the middle class, of whom half lived in Asia.
- 140 million people are reaching the middle class category annually, a rate which could rise to 170 million by 2022.
- Kharas predicts that 88% of the next billion people to join the middle class will live in Asia, with 350 million expected to come from China alone.
- This would bring the total middle class population to 780 million in the country.
- By 2030, the Asia Pacific region is projected to represent 65% of the global middle class
- In 2015, China’s middle class represented 12% of global consumption. That proportion is projected to reach 22% in 2030.
(Investors should note that in this study, the middle class is defined as households with per capita incomes between $11 and $110 per person per day in 2011 PPP (Purchasing Power Parity) terms. The wide range is a function of variation in the cost of living and corresponding expenditure averages across the 165 nations covered.)
A major factor in China’s rapid socioeconomic evolution is its ever-increasing rate of urbanization. According to World Bank data, China’s urbanization rate, the proportion of its population residing in urban areas, has soared 42.4% from 1977-2017, bringing the metric to its current level of 57.9%.
McKinsey’s 2017 China Consumer Report, published in November, took responses from 10,000 consumers, aged 18 to 65 and spread across 44 cities, along with 7 rural towns and villages. The survey found that urban consumers are earning higher income than ever before, and their spending habits are changing accordingly.
The report states that although risks remain, China’s Consumer Confidence Index has reached a ten-year high of 115, compared to 100 in spring of 2016. Moreover, the “post-90s” generation is quickly taking their place as the largest consumer segment of the Chinese market. This tech-native demographic is more health-aware, and uses technology to not only complete a large portion of their transactions, but to also more heavily research purchasing decisions.
The results also marked a shift in consumer sentiment towards foreign brands. Chinese consumers used to clearly prefer foreign brands, but are now increasingly giving their business to local players. Chinese brands accounted for 63% of personal digital gadgets in 2017 (compared to 43% in 2012), while 76% of personal care products were from domestic players (versus 63% in 2012).
Newer generations in China that have lived under better economic standards are more confident about personal income growth and are more loyal to brand names, but are also less hesitant to try new products and services as well. As Chinese businesses continue to expand and improve product quality, there are some firms definitely worth keeping an eye on.
Companies to Watch
Alibaba (BABA - Free Report) – Alibaba is now big enough that its e-commerce segment, Taobao, can pull $25 billion in a single day of sales, which fell on the nation’s “Black Friday” equivalent (11/11). The firm continues to make solid investments in new growth initiatives domestically and abroad, as well as fund future-proof research in AI development and cloud computing.
Tencent (TCEHY - Free Report) – Similarly to Alibaba, Tencent is a conglomerate that has investments and market share in numerous lucrative industries. The firm has also has stakes in popular international game developers, and is aggressively expanding in India.
China Mobile (CHL - Free Report) – The largest telecommunications firm in the Middle Kingdom, China Mobile boasts a mobile subscriber base of nearly 905 million. As more of China gets connected online, CHL will be there to help make it happen.
Ctrip (CTRP - Free Report) – Ctrip is the largest travel services company in China. The number of Chinese consumers traveling abroad is growing enormously, and the firm is capitalizing on much of that newfound traffic accordingly.
Next, we will take a closer look at the current business climate in China, and how it is set to affect both local and international players. Everyone wants a piece of the pie, but it isn’t proving as easy as many would like.
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