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How You Can Participate In China’s Growth

According to IHS Inc., a global source of critical information and insight, China is likely to become the world’s largest economy in 2024. An increase of more than three-fold in consumer spending in the country will help it displace the United States, which has held the top position for more than a century.

The shift of focus in China’s economy

China GDP Chart


As seen from the chart above, China’s economic growth is starting to slow down but those are still really fast rates of growth and there are hopes of better things to come.

The country has been undergoing structural reforms to rebalance its economy from its current investment-driven and export-oriented state. China’s goal is to eventually move its economy to a more services-oriented and consumption-powered one with a focus on science, technology, and innovation.

Rajiv Biswas, chief Asia economist for IHS, shared some numbers on China’s future economic change:

“IHS forecasts total Chinese consumer spending to grow from $3 trillion (USD) to $11 trillion (USD) by 2024 at an annual average rate of 7.7 percent per year. China’s share of world GDP is forecast to rise from around 12 percent in 2013 to 20 percent by 2025…

…Over the next 10 years, China’s economy is expected to re-balance towards more rapid growth in consumption, which will help the structure of the domestic economy as well as growth for the Asia Pacific as a region.”

The Chinese government is also very busy in other areas. It has liberalized interest rates in the country, allowed the Chinese currency to strengthen, and has been actively taking steps to reduce China’s dependency on exports. China also aims to enhance the yuan’s status as a currency such that it would be held in central banks’ reserves and be used to settle international trade just like the euro and the US dollar now. Lastly, the Chinese government has also given additional flexibility to bankers whereby they can now set more competitive lending and deposit rates in order to foster greater competition and better allocation of capital.

What it means to Alibaba and S-chips

The potential growth of China’s economy thus brings me to the Chinese e-commerce giant Alibaba Group Holdings. The company is set to begin trading on the New York Stock Exchange tonight and its listing has caused lots of excitement in the investment community.

Despite being listed in the U.S., Alibaba is clearly a China-based company with its business fortunes closely-linked to the broader Chinese economy; according to Forbes, “86% and 89% of the past two year’s revenues were from commerce in China when not including cloud computing and “other” revenues.”

Domestic consumption – and thus e-commerce – in China has expanded hand-in-hand with a rising and increasingly sophisticated middle class in the country. This aforementioned potential rise in consumer spending will likely boost the revenues of companies whose businesses are targeted at Chinese consumers – like Alibaba.

In Singapore’s share market, we also have companies like China Aviation Oil Singapore Corp Ltd (SGX: G92) and Straco Corporation Ltd (SGX: S85) as good examples of companies which might experience tailwinds from the potential growth of China’s domestic consumption.

The former is the sole importer of jet fuel into China and supplies jet fuel to key international airports in Chinese markets. It also owns several investments in oil-related assets in China. Meanwhile, the latter is an operator of and investor in premier attractions and tourism-related projects; Straco’s current flagship assets are two popular aquariums based in the Chinese cities of Shanghai and Xiamen. Straco would get much bigger exposure outside of China soon though – the company recently made headlines with the acquisition of an iconic Singapore tourism landmark, the Singapore Flyer.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.