There are two opposing views on China these days.
One faithfully bets on China’s long term potential as still becoming one of the world’s most promising markets.
The other view believes China is facing an imminent and immediate crash.
We are hit by both positive and negative news from all directions. Alibaba’s high profile IPO is seen by some as the beginning of a new era for China’s technology firms. On the other hand, institutions such as the Conference Board believe stagnation is China’s most likely scenario: ‘Slow, continuous ±2 year fall to new, lower growth rate of 3.5-5.5%. Widespread debt-induced stagnation in many cities’.
On the negative side, there is China’s debt crisis, overcapacity, deflation and slowing growth. On the positive there is urbanisation, consumer society and rising wealth.
But let me tell you the real story. Dear investor, there is no need to panic over news reports or economists’ predictions on China.
What we are experiencing now is in fact the transformation from an ‘old economy’ to a ‘new economy’.
It comes down to if you view a glass of water as half empty or half full.
While overcapacity, pollution and deflation represent the end of the ‘old economy’, one that is powered by the first phase of industrialisation, we are starting to enter the ‘new economy’. This is where the rise of technology firms is the best evidence that China is pivoting towards the service and consumption society.
What is going to make the difference is an orderly downsizing of the ‘old economy’ and the successful entrance of the ‘new economy’. Right now, that transformation is on a rough road.
Money Morning editor Kris Sayce hit the nail on the head when he contrasted China’s historical innovation with now. China has not caused any technological ‘disruption’ to the world since the invention of paper and gun power thousands of years ago.
China was the ‘sleeping dragon’ that was left behind, missing out on key periods of industrialisation and the rise of scientific thinking.
That is starting to change.
Even the Americans have been positioning themselves in China. Sequoia Capital, Matrix Partners, DCM and others have been behind some of the biggest internet IPOs in China.
What you need to do is to bet on the ‘new economy’ (however, this is not to say that secondary industries will stay in the morgue forever).
You need to think service. The ‘new economy’ of China will see the rise of a lot more services and more consumption of those services. What kind of services will they be? Well, all kinds.
You need to put on your entrepreneur hat and think. If there is a problem, there will be a solution. China’s track record in the last 10 years tells us that China’s market system does facilitate creative solutions at scale. This process is going to happen a lot faster with the coming-of–age of the private equity and venture capital industry.
The recent labour strike in Dongguan cost Nike millions of dollars. The strike was at the company Yu Yuen [HKG:551]. This no doubt exposes a major problem in China’s industrial relations, particularly in management systems and management philosophies. While this is an area of weakness, it’s also the growth area of the future.
There will no doubt be a Reid Hoffman (founder of Linkedin) equivalent in China who will clean up!
Not to mention pollution management, renewable energy, food quality control, tourism, investment products. There is a whole array of investment opportunities for those looking to invest in the growth of China’s ‘new economy’.
Simply look at what is empty, and it will be filled.
You may be aware of the Marvel Comics franchise and the film Captain America: The Winter Soldier. It has been the top box office film in China for the past three weeks.
Don’t be surprised if the Chinese population becomes the main consumers of American movies, culture, food, technology and consumer goods; in fact, they always have been.
Even Coca Cola secured a spot in China’s early primary school education (this is the sort of advertising you can only wish for), in a compulsory school book article, named: ‘American Water’. Movies work very well in China, especially when Vmax and Imax are everywhere to be found.
So media is one of the growth areas to look at. Advertising contributed 0.9% to overall GDP in China in 2012. That’s far behind the 2% contribution rate the US enjoys. Internet advertising continues to grow at a fast pace, achieving year on year growth of 46.1% in 2013.
In movies, ticket sales in China achieved US$600 million, a 30% year on year growth. That makes China the world’s second largest market by ticket sales value. However, in per capita ticket sale terms, China lags behind advanced economies.
There are two supporting factors to the movie market in China. One is government policy and the other is better quality and greater variety of films. Growth of this market will again reach 30% in 2014.
Companies in the Chinese media space are expected to see earnings per share (EPS) growth in excess of 30% in 2015. The sector is expected to outperform the index. And the price to earnings (PE) ratio will drop from the current 42 to 32 within two years, making it an even more attractive proposition.
The era of the ‘great leap’ is over.
Here, I’m referring to the failed attempts to fast track development in the 1960s. China is undergoing a great transformation, this great transformation should see early investors in the ‘new economy’ do extremely well.
I’ll leave you with what a Chinese government official told me during a conference:
‘The end of capitalism, as described by Karl Marx, comes from too much assets and wealth being sucked to the investment side. Not only does this lead to an unsustainably small consumption side, it eventually leads to an imbalance in the distribution of wealth, and the rise of the working class. Through class struggle, the imbalance is corrected. China was lucky in the last 10 years because it had exports to suck up all the overcapacity. Now, we are running out of options. We need a ‘new economy’.’
Ken Wangdong
Emerging Markets Analyst