Postcard from Beijing
09 February, 2015
David McLeish, Ashley Gardyne and I travelled to China in early January to get an "on-the-ground" update on China, meeting with a range of current and potential portfolio companies. While poor air quality and traffic congestion remain a regular feature of the Chinese landscape, a more downbeat view by many commentators on the outlook for Chinese growth contributed to the grey atmosphere. After a sustained period of slowdown there is now a growing realisation that the Chinese economy is permanently transitioning to a lower growth rate. The days of reading about 12% growth are over; albeit that with growth forecast at 6.8% in 2015, China still has enviable momentum. What interests us most though is the changing face of Chinese growth.
Chinese President Xi Jinping's aggressive anti-corruption campaign appears to be gathering momentum with corruption charges being laid against very senior Communist party members. Whether it is an attempt to strengthen his power base or is a bona-fide programme to eliminate corrupt practices in China, this climate of fear has paralysed local government infrastructure spending with the money flow all but dried up. Many significant projects are well behind schedule and you only need to look back a few years to recall how much infrastructure spending stimulated the Chinese economy post-GFC.
This logjam has had a flow-on effect to the business models of local banks and financial institutions that we visited. Over the last 12 months, they have significantly increased their lending to retail clients which has encouraged leveraged investment in the local share market (no coincidence the local market was so strong in 2014, rising over 50%) and also helped fuel consumption.
Adjusting to slower growth is always challenging but there are pockets of growth, especially in the technology and retail sectors, that we're excited about and following closely. Consumption is heralded as an important growth driver as investment spending wanes and Chinese consumers are embracing the digital trend. Online retail is expected to grow in excess of 25% p.a over the next three years, over three times faster than overall retail growth. This is being driven by the increasing use of mobile to undertake transactions with China expected to become the largest m-commerce market in the world in 2015. The digital ecosystem (product research, discovery, transaction and feedback) is maturing in China with consumers heavily influenced by feedback through social media. This system continues to be dominated by three players — Baidu in internet search, Alibaba in distribution and Tencent in social media and these companies remain potential investments for us.