Notes from China

ST Wong, January 2013

Prime Value Portfolio Manager ST Wong recently spent time in Beijing, a trip which produced some unexpected observations.

Australian equities investors will be hoping that China’s growth rate can pick up again, as our sharemarket is directly influenced by this powerhouse economy.

2012 was an interesting year for China, which experienced a slower rate of economic growth, changes in the drivers of growth and political leadership change. There are signs of economic improvement, which will please the local sharemarket bulls, but it is early days in 2013 and it will be fascinating to see how the year unfolds for the world’s most populous nation.

Here are some of my notes from a recent trip to Beijing.

Lack of cranes: Our experiences in Asia tell us that cities in economies growing at China’s rapid rate of economic growth (7-8%) have plenty of construction cranes overhanging construction projects. This was notably absent in the inner city areas of Beijing. While surprising, it could reflect an element of controlled development. Construction activities were continuing apace in the outer areas of the city, primarily in residential developments.

Foreign consumer brands: Global consumer brands are present in Beijing but still limited in penetration. MacDonalds and KFC appear to be the leading mass market global brands. Hong Kong-based jewellery/watch/gold retailers (for the more Asian centric, names such as Chow Tai Fook) are making inroads in the discretionary consumer segment. Some of these stores occupy prime spots. These companies are poised to build on their franchises in China. Overall, domestic brands dominate.

Traffic jams: Beijing is an extremely large city (estimated population circa 20m). It is difficult to avoid the traffic even when travelling 10-15-20 km way from the city centre – a new 4 lane highway was experiencing traffic problems even at 9pm on a weekend. The traffic congestion seems to even beat Bangkok where traffic jams occur predominantly during peak hours and closer to the city centre. There are two observations: First, infrastructure deficiencies are still an issue. Second, the high traffic volumes, even at a great distance from the city centre lends credence to the ‘build-and-they-will come’ approach.

Automakers: The presence of Chinese made/branded cars on the roads is no surprise. What surprised is the increasing penetration of Korean makes such as Kia. Comparatively, the tradition Japanese makes such as Toyota and Nissan have lower penetration. Winners and losers as China emerges as a top 3 global auto consumer.

Restrictive internet: Just another reminder that China is a command economy—accessing international sites were filtered. You may have read about Google’s non-compliance to Chinese filtering demands rendering the site in-operable in China, so too were China-critical sites such as the New York Times. Pleasingly, we had no problems accessing Australian sites.

Property: Continues to be a well debated topic amongst locals. We note that there was little construction activity within the more central parts of Beijing (especially that of residential and commercial)—ironically, this would probably only serve to drive inner city housing prices higher. Locals tell us that older parts of the city continue to be redeveloped (including well-publicised historical parts). However, spreading further out from the city centre, residential construction continues apace.

Tourism: Outbound Chinese tourism is growing rapidly, particularly in large tour groups. This is an emerging trend that should continue to grow strongly as the Chinese middle class grows and visa restrictions tumble.