The China today is vastly different from the China of the past. Rapid innovation and rising domestic consumption are powering higher quality Chinese growth, creating opportunities for discerning investors. As China’s economic and technological dominance grows, investors will likely need to consider making a more direct and deliberate allocation to China’s financial markets.
Already the world’s second largest economy, China is expected to account for close to 20% of global GDP by 2024 (See Fig.) and make up more than 35% of global GDP growth1. Since opening up to foreign trade and implementing free-market policies in 1978, the Chinese government has continued to roll out a series of reforms to create a more sustainable growth model, powered by consumption and services.
Fig. China to account for almost 20% of the world economy2 (% of world GDP in current US dollars)
China is estimated to dominate the MSCI Asia ex Japan Index by 2024, potentially accounting for close to 50% of the index (See Fig.) In particular, as the China A-share market becomes more accessible to offshore investors and with global index providers increasing the weight of China A stocks in their regional and global indices, foreign institutional ownership of China A equities is likely to rise. Likewise, the inclusion of China bonds into global bond indices suggest that China bonds will become an important component of global bond portfolios. The lower correlation of Chinese financial markets with other global markets adds further compulsion for global investors.
Fig. China’s weight in the MSCI Asia ex Japan Index expected to rise3
China’s transformation to become a high-income economy hinges on its ability to secure a sustainable environment. China is now the world’s largest investor in renewables (See Fig.) with the government taking a strong lead in reshaping China’s financial system and encouraging the private sector to invest in green projects. China’s carbon intensity fell to 0.45 kg of CO2 emitted per unit of GDP in 2018, from 0.71 kg in 20084. The world’s biggest energy consumer is aiming for renewables to account for at least 35 percent of electricity consumption by 20305.
Fig: China is the world’s largest investor in renewable energy6
China is a global leader in technology, as evident in its world-class consumer internet, mobile payment systems and deployment of artificial intelligence. China’s robotic market is currently the world’s largest, representing 36% of the total units installed globally in 2018. Not resting on its laurels, China continues to invest heavily in technology. It is the world’s second largest research and development (R&D) spender, with USD452 billion invested in 2018 (see Fig). China’s rapid technological innovation will continue to be a key driver of the economy while offering investors significant investment opportunities in related sectors.
Fig. Public Research & Development expenditure, 2018 (USD billions)7
China’s urbanisation rate was 59.2% at the end of 2018, up from 17.9% in 1978 (see Fig). This rapid pace of urbanisation is expected to continue. The Chinese Academy of Social Sciences projects China’s urbanisation rate to rise to 70% by 2035. By that time, one billion Chinese people will be living and working in cities with areas of 100,000 km2, using smart technologies in their day-to-day lives. Such rapid urbanisation will revitalise rural areas, bringing about economic growth, higher living standards and viable industries.
Fig. China’s urban population continues to rise (% of total population)8
The potential of China’s consumer spending is no secret, but the pace of consumption growth continues to astound. McKinsey Global Institute forecasts that by 2030, 58% of Chinese households will be mass affluent consumers9, up from 12% in 2018. This new group of Chinese consumers will not only demand necessities but also quality goods and services. Such additional spending patterns will create a consumer market worth a staggering USD13.9 trillion by 2030 (see Fig.), presenting opportunities for China’s consumer companies that understand local preferences and nuances.
Fig. China’s rapidly growing consumer spending10 (Current USD, trillions)
Healthcare spending accounted for just 5.0% of China’s GDP in 2016 (see Fig). From 2020 to 2035, China’s healthcare expenditure is expected to increase by more than 3-fold to USD2.53 trillion as China’s population ages. By 2035, China’s senior citizen population (aged over 60) is expected to hit 409 million, accounting for 28.5% of the total population11. At the same time, higher living standards will also increase demand for quality drugs and medical services, resulting in significant opportunities for investors in the healthcare and related sectors.
Fig. Annual healthcare expenditure, (% of GDP)12