China’s consumption led recovery

India has been a consumption led economy – We make more, we consume more and the economy grows. But China’s economy was different. Till now. For the last 40 years, economic development in China was led by export growth. Around the time the world was grappling with financial crisis, a third of the Chinese GDP growth (33%) was driven by cheap exports. But with increasing salary levels and the slow disappearance of cost arbitrage, this figure has come down to 20% – The same as it is for India today.

But in spite of this reduction in exports, China’s GDP data for q3 of the calendar year 2020 showed that the economy grew by 4.9% compared to the same quarter a year ago. Imports into the country surged by 13%. Key metrics like retail sales, vehicle sales, property investments etc., gained indicating that demand was robust, and recovery was broad based across sectors. IMF said that China could be the only major economy to record positive growth this year (+1.9% projected). This is when countries like US (-4.3%), UK (-9.8%) and India (-10.3%) are expected to shrink.

First things first, what is going on? The generally accepted hypothesis is that China is going the India way – Turning from an export led economy to a consumption led one. And if there is one country at all that call pull that, it is China. Consider this – Your propensity to consume is directly proportional to the amount of money you have in your bank account. Agreed? The Chinese have close to $30 Trillion in money stashed up in bank deposits. That is 2X their annual GDP. The same figure for India is 0.66X and that for US is 0.5X.

 

Now, if you are an astute equity investor, you are probably asking yourself, “How do I get a piece of that action?”.

 

Turns out, it is quite simple. There are China focussed fund of funds which will allow mutual fund investors in India to get exposure to Chinese stocks. One such fund recorded 54% gains in the last 1-year period (if you look it up, you’ll find out which one we are referring to in no time).

 

The chart below shows the top 5 companies (all businesses focussed on Chinese consumption) held in the portfolio of this mutual fund and their revenue/profit growth in the most recent quarter.

There are favourable tailwinds for some of these businesses. TSMC for instance is the world’s largest semi-conductor chipmaker and is expected to make a windfall on the back of strong demand for 5G phones. Alibaba owned (33%) Ant financial is expecting that its upcoming IPO will be the largest ever in the world when it lists in Hong Kong and Shanghai.

 

There are significant risks in the short term too, however. The growing tension between US-China has meant that Chinese tech companies and chip makers like TSMC are getting caught out in the middle. The US election could prove decisive for some of these businesses. But for an individual investor who is overwhelmingly invested in Indian equities, investment in China provides an important geographic diversification in the portfolio.

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