How To Cash In On China’s Slowdown

For the last couple of decades, we have become accustomed to hearing about how well the Chinese economy is doing. It has come as a rude awakening for all of us to find out that after years of double-digit growth, the economy of China is slowing.

According to the Chinese government, growth this year could be around 7%. But some are sceptical that the Middle Kingdom is even growing anywhere close to that. Whether it is 7% or some lower figure, it was always inevitable that China’s economic growth would moderate.

Unrealistic assumption

Nothing ever goes up in a straight line. It was always unrealistic to assume that China, which is the second-largest economy in the world, could carry on delivering high-octane growth through its role as the low-cost factory of the world.

For over 20 years, China has been manufacturing cheap T-shirts, inexpensive shoes, and everything else we might wear in between. It has exported price-deflation and imported commodities by container loads, to fuel its expansion.

Many countries around the globe benefitted enormously. Countries from Brazil and Venezuela in the western hemisphere, Singapore in the East, to Australia in the Pacific, gained enormously from China’s almost insatiable appetite for oil, commodities and foreign exchange. Those who bought into the cute idea of the commodities super cycle made money by the barrel-load. That is until now.

Course change

China is changing course. It no longer wants to be the world’s budget manufacturer. That is partly because it doesn’t want to be; partly because it cannot afford to be, but mainly because Chinese workers no longer like to be, anymore.

The reasons are obvious. Over the last decade, the annual disposable income of Chinese consumers has jumped nearly three-fold to around US$4,500 per person. The average Chinese is getting richer.

They are not millionaires, by any stretch of the imagination, though. They are not even middle-class by developed-economy standards. But they have money to spend. The recent surge in China’s stock market could be a testament of the vast amounts of money swirling around its economy looking for a home. Some found the stock market.

Rise and rise

The rise and rise of Chinese shares was definitely misguided, though. But the collapse of the Chinese stock market is unlikely to derail China’s stated strategy to successfully rebalance its economy.

For better or for worse, China’s vice-like grip on its command economy will ensure a transition from being export-led to one that will be spurred by consumers. It might not be a smooth transition, but it will happen because it has to happen.

According to the World Bank, household spending currently accounts for just over a-third of the Chinese economy. That is low by developed-economy standards. But it also means that there is plenty of room for growth.

Shop ‘til you drop

Additionally, retail sales are growing, despite the Chinese government’s clampdown on conspicuous consumption. In August, it said retail sales increased 10.8% from a year ago. It was higher than in July… despite the stock market crash.

The Chinese authorities can and will clamp down on corruption and, perhaps, conspicuous consumption. But it will find it hard to stop inconspicuous spending, which could provide growth opportunities for shrewd investors.

A clue to where that growth might be found was provided by the full takeover of the UK’s Weetabix by China’s Bright Food.

Many of us might have been seduced by the idea that Chinese consumers are hankering for diamond-encrusted watches, posh handbags and branded skyscraper stilettoes. Some consumers might be. Consequently, the likes of Jimmy Choo and Louis Vuitton could continue to have a niche in China.

Mundane is good

But the reality is that it is the mundane things that Chinese mass-market consumers are after. They are looking for quality foods, trustworthy toiletries, reliable healthcare products and soft drinks and dependable places to dine out.

Peter Lynch, one of the most successful investors of our time, once said: “Companies that sell soft drinks, hamburgers, medicines – things that people either can’t do without or can easily afford – can sail through a recession unscathed.”

These companies are also some of the most likely to benefit from a rebalancing of the Chinese economy. That is because they produce the things and deliver the services that consumers can easily afford with their growing disposable income.

In Singapore we have many companies that fit the bill. Many of these businesses already have some exposure to the Chinese consumer. These include BreadTalk (SGX: 5DA), ComfortDelGro (SGX: C52) and Straco Corporation (SGX: S85).

In some cases, their exposure to China is small. In other situations, it can be quite significant. But it is crucial that they have some exposure. It might also be a good idea if we have some exposure to China too. It is too big to ignore.

A version of this article first appeared in the Independent on Sunday.

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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 Director David Kuo doesn’t own shares in any companies mentioned.