1. Newsroom
  2. The drivers rebalancing Chinese growth
UBP in the press 16.01.2017

The drivers rebalancing Chinese growth

The drivers rebalancing Chinese growth

Sphere - The rebalancing of Chinese growth seems to be the macroeconomic phenomenon attracting most comment at the moment, second only to central-bank decisions.

There are two main issues at play. Firstly, investment has historically accounted for a large proportion of China's GDP growth, but that is now falling as consumer spending takes up the reins. Secondly, China can no longer be classified simply as a provider of cheap labour, and is gradually moving towards higher-value-added exports.

However, although economists are still debating this rebalancing in public, we are already seeing its consequences in terms of share prices and corporate strategy. "New China" sectors (consumer goods, technology and services) have substantially and consistently outperformed "old China" sectors (manufacturing, energy and commodities) in the last five years. This is an additional sign that a secular shift is happening.

At the corporate level, there are many examples, but Lenovo is perhaps the one that says most about the changes taking place among Chinese companies. Lenovo was originally a small company making PCs for its local market, but grew to become Chinese number one in 1996, Asian number one a few years later and then world number one in 2013. In the process, the company has moved from desktop PCs to laptops, and is now targeting the mobile phone and server markets. It had to change its name in order to develop a real brand, and it has acquired the ability to promote and distribute its products in most developed countries. Lenovo's star has faded a little, since its share price has performed poorly in the last two years. However, its story remains instructive because it shows many of the strategies that companies involved in rebalancing China's economy are adopting in other sectors, i.e. a constant focus on innovation, dominance of China's large national market and the sensible use of foreign acquisitions.

Innovation is obviously welcome in many other countries, but in China it helps a company stand out in a hotly contested domestic market. Lenovo has scored an incredible number of firsts in China : for example it made the first Chinese-language PC and the China's first Pentium PC. That made it the leading player in this growth industry, also taking advantage of China's low production costs. Similarly, Chinese internet giants Tencent and Alibaba are now spending heavily on developing new services. They are among China's leading R&D spenders, and are now at the leading edge of global innovation in areas like electronic payments. The time when their strategy was based on taking innovations developed elsewhere and applying them in China is over. These companies are now at the forefront of their industry.

The second strategy involves leveraging the scale of the domestic Chinese market. In many industries, as consumer spending grows, the Chinese market is so large that a company that dominates it already ranks highly in the global league table. Xiaomi became one of the world's largest smartphone-makers before it exported its first phone, due to the phenomenal success of its products in mainland China. When that start-up's position weakened and its sales declined, Huawei was the big winner of the local battle for market share and moved into the world top five. If Huawei were to weaken, it is a safe bet that its place in the global league table would be taken by one of its Chinese rivals. Already, brands like Oppo and Vivo are moving up the rankings. They were unknown outside China 12 months ago, but they are now established in their domestic market and featuring in the global league tables.

The pattern is repeated in other sectors. TV manufacturers Hisense, TCL and Skyworth each have almost 15% of their domestic market, which represents almost 160m units per year and in which domestic brands take the lion's share. The quality of their best products is rising all the time and is approaching international standards, although their brands are not yet a match for those of South Korean or Japanese manufacturers.

They could well continue to move up the value chain. Comac, the creator of China's first commercial short-haul aircraft, is being able to develop its product range because of robust demand from domestic customers prepared to buy aircraft made in China. Its first model, the ARJ 21, is a 90-seat short-haul aircraft, and Comac has sold more than 300 of them for a total of $11 billion at list prices. Almost all buyers have been Chinese. Buoyed by that success, the company recently announced a co-operation with Russia to develop a long-haul aircraft. Boeing and Airbus do not feel challenged at the moment, but they acknowledge that the long-term threat is real.

The final strategy consists of acquisitions. Chinese champions seem to be buying up foreign companies at a faster pace than before. Carmakers are using their strong local positions to make ambitious deals, such as Geely's acquisition of Volvo and the increase in Dongfeng Motors' stake in PSA. Some time ago, Lenovo acquired IBM's PC division, which helped it to win market share outside China. Carmakers are using the same strategy. For example, Geely has used Volvo's expertise to develop a vehicle aimed exclusively at the top end of the Chinese market. It has also opened a Volvo plant in China, which it will use as a low-cost base for producing cars for the US market. Even more ambitiously, Tsinghua Unigroup has made a series of acquisitions in the semiconductor industry, including Spreadtrum, RDA and Powertech. The group has recently come up against some opposition because its targets are sensitive ones for the US and Taiwanese governments. This kind of resistance will probably slow dealmaking by companies like Tsinghua, but does not fundamentally change their long-term plan. China accounts for more than a quarter of the world's demand for memory chips. Increasing national production is a national priority.

Despite the diverse nature of the sectors concerned, all these companies have something in common. They are benefiting from the shift in Chinese growth towards consumer spending, and are using their strong local positions to expand internationally in segments that Chinese companies have not previously addressed. That is one of the reasons why China's share of global trade is continuing to rise. Although legitimate questions have been raised about the health of China's financial sector, this fundamental trend seems sufficiently well established to continue.

Read the original article in French
Read the original article in German

NEGRE Mathieu_p-1.jpg

Mathieu Nègre
CFA, Head of Global Emerging Equities

Most read

UBP in the press 18.10.2018

Tech sector driven by innovation

Sphere (10.2018) - Since the 2008-09 global financial crisis, the global technology sector has delivered an impressive annual return of 15.4%, easily outpacing global equities as a whole (10.2%).

UBP in the press 26.09.2018

Asset TV Fund Selector: Fixed Income

What does the end of quantitative easing mean for bond investors? What should be the right exposure to emerging bond markets and why are active managers better equipped than passive ones to handle the return of volatility? Mohammed Kazmi, Portfolio Manager & Macro-Strategist Global and Absolute Return Fixed Income at UBP, recently participated in an Asset TV broadcast outlining the risk and reward trade-offs in fixed-income markets over the next six to twelve months.

UBP in the press 28.09.2018

AI will benefit Swiss banks

Bilan (25.09.2018) - “If I had to bet on which would be the leading professions in the years to come, Swiss bankers would be on the list!” This prediction by Laurent Alexandre, the founder of the Doctissimo.fr website, may come as a surprise to some.

Further reading

UBP in the press 08.03.2019

The appeal of convertible bonds in volatile market conditions

Agefi Indices (25.02.2019) - The large amounts of convertible bonds issued in 2018 have created new investment opportunities.

UBP in the press 26.02.2019

Swiss banks still relevant in era of greater transparency

Thomson Reuters Zawya (21.02.2019) - UBP's emerging markets push into the Middle East and Asia has been helped by the acquisition of former Lloyds and Coutts businesses.

UBP in the press 21.02.2019

Making the most of open architecture

Fund Selector Middle East (18.02.2019) - Dubai expansion plans as Swiss-owned family firm’s asset management arm wins mandates.