Year of the Tiger: Time for China 3.0, they say
Updated: Mar 29
As China celebrates the New Year, we’ve heard from the good people at the Polar Capital China Stars Team which suggest that we are in for some interesting times.
Over to them.
After the Year of the Ox, 1 February will usher in the Year of the Tiger. In Chinese culture, the tiger is a symbol of strength and bravery, precisely the traits investors need to embrace and take advantage of the attractive opportunities in China equity given the prevalent bearishness after a bruising year.
2021 was a year of significant importance, as it marks the end of what we call China 2.0, and 2022 the beginning of China 3.0.
China 1.0 started in 2001 when it joined the World Trade Organisation (WTO). It can be summed up in one word – urbanisation. China 2.0 was all about digitalisation. It kicked off in earnest in 2011 when Tencent’s WeChat app launched, after the 3G mobile network brought cheap and ubiquitous internet access to everyone. It is not surprising to find that in an urban China 1.0, the best wealth creators were the energy, construction, transportation and commodity companies, and in a digital China 2.0, it was all about consumer internet companies.
So, what is China 3.0? In a word, it is inclusiveness. The inclusion of 600 million low-income left-behind to the consumer economy, the inclusion of considerations of the environment, society and other stakeholders in its growth model, and the inclusion of other high-tech industries in addition to the consumer internet as its source of innovation.
Emergence of a truly middle-class economy
Three decades into China’s remarkable growth, we have two very different Chinas. A “developed China” with 200 million truly middle-class consumers, and an “emerging China” that includes 600 million people on a low income who have been left behind with barely any spending power.
The Chinese Communist Party’s priority has shifted from a singular pursuit of growth and efficiency to one that balances growth with sustainability and efficiency with equality. This strategic shift towards prosperity for more, if successful, has the potential to completely transform China’s consumer market. In the next decade, we are likely to see the emergence of a 500 million middle-class consumer economy, overtaking the EU as the single largest market of consumers with strong spending power.
More sustainable and inclusive growth
The grassroots and government’s awareness of, and support for ESG have been accelerating. There is now a strong consensus that sustainability should be the cornerstone of China’s new growth model.
With China’s top-down commitment to peak carbon by 2030 and neutrality by 2060, and rising awareness to ESG issues among consumers and corporates, we believe it augurs very well for its transition to a more sustainable and inclusive growth model. China has already displayed actions to mitigate ESG issues. China is facing a severe water scarcity problem, but its water supply system is leaking almost 15% of the precious resource, materially above the global average. Technology innovation and smart systems can provide the perfect solution. In 2021, we invested in a specialist in smart water. In one of its flagship projects with Shaoxin city, the city’s water leakage declined from more than 20% in 2010 to 3% in 2020, setting a high benchmark for the rest of the country.
Broadening of the innovation engine
In China 2.0, the Middle Kingdom has shown its capacity for innovation.
If innovation in the past decade was centred around consumer digital technology, we are witnessing the broadening of China’s source of innovation from consumer internet to many other industries including automation and robotics, software, artificial intelligence and biotechnology. As a result, the pace of Chinese innovation is likely to accelerate.
Nowhere is this more evident than in automation and robotics, an industry that has been dominated by some excellent European and Japanese companies. Over the past five years, we have seen Chinese companies quickly moving becoming more innovative and competitive, not just regionally but globally.
The acceleration and broadening out of China’s innovation is great news for investors as we have more high-quality, value-creating companies to choose from.
Time for China 3.0
Last year was a year of regulation, policy tightening and financial de-risking in China. Looking out to the Year of the Tiger and beyond, we are increasingly more constructive on Chinese equity.
Our bullishness is reinforced by a decisive pro-growth pivot we saw in December from the country’s top policymakers. An easing liquidity and credit cycle, peak regulation, and rock-bottom valuations and sentiment are the three pillars of this constructive view on Chinese equity.
Some of the hardest hit sectors last year are likely to drive performance. There are signs of stabilisation and reduced competitive intensity in the internet and digital technology. For healthcare, the worst pricing environment is likely over. In consumer sectors, a pro-growth policy shift is supportive of consumption. The strong trends in the adoption of factory automation and the rising penetration of electric vehicles are likely to continue for many years to come. As such, while valuations are less compelling, we still see attractive stocks capable of delivering robust growth with the potential for more upside.
The Year of the Tiger marks the beginning of China 3.0, a new paradigm of a more inclusive economy, more sustainable growth and accelerated pace of innovation. As China picks itself up off the floor, we believe there are plenty of opportunities in well-priced and high-quality companies with high structural growth. It may be one of the better times to buy this new and better China story.
Wishing you a happy and prosperous year of the tiger. Kung Hei Fat Choy. Gong Xi Fa Cai.