The growth of the middle and upper class in China is creating opportunities in sectors such as consumption, healthcare and Internet. But there are also many challenges that the Middle Kingdom is facing during its economic transition, GAM's Jian Shi Cortesi writes.
Jian Shi Cortesi is a Portfolio Manager of Asian equities for Swiss asset manager GAM
The Chinese economy is making the transition from a fixed-asset-investment led economic model to a consumption driven economic model. This is partially driven by the increase personal income. The average salary in China, which was around $1,000 in 1999, has risen to almost $10,000.
It is estimated that the upper and middle class (with annual disposable income above $16,000) will grew to 80 percent of Chinese urban household's by 2022. This is creating large opportunities in sectors such as consumption, healthcare and the Internet.
As Demand Slows
There are many challenges that China is facing during this economic transition. The debt level has risen to above 250 percent of Gross Domestic Product (GDP), and the debt is concentrated in industries related to the old economic growth model, such as construction and raw materials. As demand slows, these sectors suffer from overcapacity and poor profitability.
The government has made plans to cut excess capacity in these industries over the next ten years. However, the pace will be carefully managed to avoid severe impact on employment, specifically in certain regions.
Little Know Outside China
The government is trying to push forward a number of large scale reforms to facilitate the economic transition, including state-owned-enterprise reforms, financial reforms, pension reforms and healthcare reforms. These reforms aim to create a more efficient and more open economy. So far a number of reform initiatives have been announced, but the overall pace remains slower than what had been expected by internal investors.
A number of strong Chinese brands have risen over the past two decades. While a few brands have established a global presence (such as Alibaba and Lenovo), most Chinese brands are well known only within China. For example, Chinese liquor brand Kweichow Moutai, the world’s second most valuable liquor brand, is little known outside China, but is a household name in China.
Also a Good Way
Chinese companies have sought overseas acquisitions to gain control of good foreign brands as well as to establish its own brands overseas. One example is Lenovo’s acquisition of IBM’s personal computer business in 2005. Another example is Chinese auto maker Geely’s acquisition of Volvo in 2010.
Besides improving its brand awareness outside China, buying a well-known foreign brand is also a good way to build a positive brand image in the eyes of Chinese consumers and generate a high level of confidence in the company’s products and services.
Prior to joining GAM in May 2010, Jian Shi Cortesi worked in research and portfolio management of Asian equities for a regional wealth management firm in the United States. She started her career as an assistant editor at Dow Jones in Beijing. She holds a Bachelor degree in International Business from Beijing Foreign Studies University in China and an MBA from the University of Tennessee in the United States. She is a CFA Charterholder and a Certified FRM (Financial Risk Manager) holder.
