“辛辛苦苦几十年，一夜回到解放前” is Chinese slang used to describe one who has toiled for years but whose hard work vanishes overnight and he/she is cast back into a pre-1949’s standard of living. This term is now commonly used on social media. As many have grown richer, its use is becoming more common as the plight of the “Left Behinders” is becoming more obvious.
It is perhaps understandable therefore that the Chinese government has introduced a series of policies and regulations which are primarily designed to spread the opportunities to these “Left Behind” people. However, these recent measures have also shaken the capital markets. Many international investors have asked whether this might be a serious brake on corporate profitability and undermine the valuations of a lot of growth stocks. Some doubt whether Chinese consumers will continue to spend. Others speculate on margin compression for consumer-facing companies.
It might help to remember that the economic miracle of “Capitalism with Chinese Characteristics” has moved over 800 million people from extreme poverty in just 40 years! In 1978, China’s GDP was only 6% of the USA’s GDP; fast forward to 2020, it is now 70% and the 2nd largest economy in the world. This vast wealth creation sometimes makes international investors forget that the political and economic systems of China and the West remain fundamentally different. Some investors focus on the “Capitalism” of the above slogan and forget the part “with Chinese Characteristics”. There is a tendency to believe economic growth and democracy should go hand in hand. However, that was not Deng Xiaoping’s proposition – Dengism promised reform and modernisation, which would make all Chinese people wealthier. But political control would always remain in the hands of the Party. It is the Party that presses the accelerator of liberalisation and from time to time applies the brake of regulation.
As you know, Aubrey Capital Management’s investment thesis rests on the secular growth of consumption in the Emerging Markets. The rise in prosperity and disposable income and the resulting change of behaviour presents fantastic opportunities for the companies that meet the demand for new products and services. Our process is designed to help our investors benefit from these opportunities. As this is a secular story, it is also a great hedge against the cyclicality which affects many of the big index stocks.
Today, over 20% of global middle class resides in China. This rapid growth, however, has not brought equal opportunity to all: the top 1% of population in China owns over 30% of total wealth whilst 600 million people only earn around RMB 1000 (USD 154) per month; the rate of growth of middle-class wealth is slower than that of the super-rich; and the younger generation faces challenges such as expensive childcare, education and property, and increased competition in the job market.
To continue the next phase of growth and to avoid the middle-income trap, the Chinese government has been actively addressing these issues and the social problems that result. Whether it is the recent education sector crackdown or anti-trust regulation, there is a cohesive theme: that of Common Prosperity, which should produce a more balanced society.
The concept of Common Prosperity actually dates back to 1950s. Back then its purpose was to lift people out of extreme poverty. Its recent incarnation is to take those who have been lifted out of poverty into the middle class. In the early noughties, less than 5% of the population (less than 50 million people) was classified as middle class. Today the numbers are closer to 700 million people. This growth of the middle class has increased consumption, which has been the fastest growing segment of the Chinese economy over the past two decades. But we would argue that the policies aimed at increasing the middle-class cohort present companies with further fantastic growth potential even though in the short term they might put pressure on margins. Companies like Meituan’s costs may increase marginally if it has to pay drivers minimum wage, but will it care if its top line grows as a result of another 100 million consumers become able to afford its services? We would say the same goes for companies such as Tencent, Pingduoduo and Wuliangye.
It is important to realise that Common Prosperity is not anti-capitalist nor anti-consumer spending (as most of my friends and family in China tell me it is “Business As Usual” on this front). Neither is it aimed at “killing the rich” (another Chinese expression which has been used recently!).
The fact that indices of A shares have sustained much more modest falls than those suffered by growth stocks with ADRs and large foreign investor interest suggests that Chinese investors are taking a more sanguine view of the effects of Common Prosperity than their international counterparts. Some guidance on further measures has been mentioned by government officials such as income tax, property tax and charitable donations. Do these policies sound familiar? Surely they are remarkably similar to those introduced by most of the West democratic countries early in the last century? (China’s Robber Barons?). Ultimately, China aims to encourage innovation and cultivate a balanced society to create more opportunities, consumption, and growth through these policies in the long run.
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