I recently visited China, spending time in Beijing, Shanghai and Hangzhou to gain firsthand insights into China’s evolving and dynamic consumer market. Through a series of meetings with company management teams, industry experts, suppliers and distributors, I was able to deep dive into the complexities of the market and both the opportunities and risks facing businesses.
China’s Economic Landscape
China is an economic powerhouse as the world’s second-largest economy, backed by key indicators such gross domestic product (GDP), export dominance, foreign trade surplus and significant foreign direct investment (FDI). It is a world leader in manufacturing, infrastructure investment and has a growing and shifting consumer market. Many global companies have ambitions to benefit from the rising middle-class consumption in China, in industries such as luxury goods, beverages and healthcare.
While China’s economic power is undeniable, the more recent economic environment has been challenging and we have seen a deterioration in consumer confidence. This became more evident when “consumption downgrade” was a recurring topic across many of my meetings.
The WAM Global investment team are encouraged by the announcement of fiscal stimulus from the government. Our view is that the government will seek to stabilise the property market and support asset prices to revitalise economic transmission mechanisms.
A Shift Toward Value and Affordability
One noticeable change in China’s consumer behaviour over the past decade is the shift away from globally recognised, high quality brands, toward value and affordability. This trend has accelerated since COVID, driven by slowing economic growth, rising living costs and a weak job market.
Local brands, once seen as a lower tier alternative, are now chosen for their competitive pricing and high-quality products. The coffee market is a great example of this, in which international brands such as Starbucks are facing increasing competition from local players such as Luckin Coffee, Manner Coffee, M Stand and K Coffee among others, which offer comparable products appealing to local consumers at lower prices.
This trend is also being seen across sportswear, beauty and automotive sectors in the Chinese market. Domestic brands such as Anta (HKEX:2020) and Li Ning (HKEX: 2331) are offering comparable product to Nike and Adidas. Chinese automobile manufacturers such as Build Your Dreams (BYD) (HKEX: 1211) and Xiaomi (HKEX:1810) are challenging traditional automakers with affordable electric vehicles.
Intense Competition and Innovation
This shift is well and truly underway and has led to intense competition for market share in China. Discussions with management during my time in China made it clear that companies are cutting costs, improving productivity and investing in innovation to stay competitive. Due to the weak demand environment, businesses are offering discounted pricing and extending promotional periods to sell excess inventory. This was evident in key shopping events like the Double 11 (Single’s Day) festival.
Signs of Optimism Amid Economic Challenges
Despite the economic challenges, there are signs of cautious optimism. The announcement of more co-ordinated fiscal stimulus was seen as a positive move. Local governments are looking at acquiring excess housing inventory and in an unprecedented move, the People’s Bank of China (PBOC) is actively promoting equity purchases. It has committed 500 billion RMB for equity acquisitions through repurchase agreement facilities, with plans for additional funding if necessary.
Most companies expect to see further government fiscal stimulus aimed at supporting lower to middle income households, including measures such as incentive payments to encourage higher birth rates, trading in white goods and large-scale equipment upgrades.
For investors, this presents a potential opportunity. Low valuations, fiscal and monetary support and potential for earnings growth from a low base is an attractive set up. We expect a gradual recovery in consumer confidence in 2025.
Structural Challenges and the Longer-Term Outlook
From a longer-term perspective, China still needs to address a number of structural challenges:
- local government debt: local governments have accumulated significant debt financing infrastructure projects, which may strain fiscal resources;
- excess property inventory: the property sector remains a concern, with unsold housing and declining prices dampening consumer confidence and economic growth;
- demographic issues: China’s low birth rates and ageing population pose long term challenges, particular to the labour force; and
- tariffs: under a Trump administration, the U.S. could impose significant tariffs on imports from China beginning early next year which we reduce economic growth.
While we expect a gradual improvement, we are mindful of the longer-term risks and uncertainty. We expect to see more policy announcements in 2025 tackling these key issues.
US – China Dynamic
One thing that stands out from my time in both the U.S., where I have been residing over the last 12 months, and China is the contrast in public sentiment. While China contends with economic challenges, the U.S. economy has remained largely resilient. The uncertainty of the U.S. election is behind us and we expect Trump to enact pro-growth policies such as tax cuts, deregulation and efforts to bring manufacturing to the U.S.
As a team, we are constantly evaluating companies from a bottom-up fundamental basis. Our investment process is centred on finding high quality, well-managed international companies purchased at attractive valuations with a catalyst. Currently the WAM Global investment portfolio has limited exposure to China and the majority of our investments are in U.S. and European listed companies. However, we believe China is an important market to follow as the Chinese economy impacts both local and global companies and will continue to do so in the years ahead.
