It’s easy to worry about the downside risk of China with its potential for a hard landing, but what about the upside? China’s consumer market presents huge opportunities for exporters of goods and services in the longer term, such as Australian tourism and education, with investors searching for growth in what could well be Australia’s next investment boom
Consumption growth in China has been remarkably steady
While GDP growth data is unreliable, various more reliable indicators of growth have shown that manufacturing and investment growth in China has likely fallen from over 10%pa between 2009 and 2014, to 0 to 3%pa growth in the past two years.
On the other hand, consumer spending has been running at more than 10%pa for the past five years. This growth rate is even more remarkable when you consider the sheer size of the Chinese economy. Consumer spending in China is around US$4.5 trillion, so a 10% growth rate equates to US$450 billion of new spending each year.
To put that number into perspective, Australia’s total consumer spending is around US$160 billion pa and grows at around 3% or US$4.5-5.0 billion a year. If Australia captures just 1% of the growth Chinese consumer spending of $4.5 billion, that would double our growth rate.
Now that’s the usual “China is huge so we just have to capture a tiny piece of it” maths argument. In reality, we don’t have rights to earn a share of Chinese growth in consumer spending; we have to earn it through old fashioned competition and innovation. Our history suggests we can do well, but we have to position ourselves for where that spending will be.
What can Australia make that the Chinese will want in the next decade?
China’s spending on discretionary items – excluding food, clothing and other household essentials – is expected to grow at around 8%pa over the next decade, according to McKinsey. Their spending on recreation, education and culture will rise from 13% of their expenditure today to 21% in 2025, which, given the rapid growth in total spending, equates to a rise from US$550 billion in 2015 to US$1,200 billion in 2025. For some more perspective, our total education and tourism industries are worth around US$110 billion a year.
Both education and tourism have very positive knock on effects on other Australian sectors, particularly property. Chinese savings are amongst the highest in the world and their propensity to deploy those savings in “safe” locations such as Australia, New Zealand and Canada is well established. While deeply politicised, from an investment perspective, the outlook for Australian property will be increasingly positive the longer China’s consumption growth phase continues. This is bullish for Australian property developers, provided they are not too aggressive with short term debt as the cycle will be bumpy.
Aside from tourism and education, food must not be overlooked. Total spending numbers become much less relevant as Australia cannot produce enough food to satisfy the bulk dietary needs of China – but the premium foods market is an enormous opportunity. Meats, seafood, processed fruits and vegetables and dietary supplements (evidenced in the recent boon for Australian vitamin and supplement providers) are all categories that will grow at about twice the average rate for food consumption in China overall, and are all categories to which Australia holds a unique global brand.
These categories alone have potential to dwarf the upside from the mining investment boom. While they will not create an immediate jump in investment, the effects will be much longer lasting.
What can investors do about this today?
Investment and manufacturing in China will drive global market volatility in the near term, but not its consumption. From an investor’s perspective, this means volatility and fear will remain the main outputs from China. Particularly for income seeking investors and those that cannot afford capital losses in the near term, China is best avoided, and in fact the prudent investor should hedge against sudden changes in sentiment about China by keeping some of their capital in non AUD assets.
Sometime over the next five to 10 years, the Chinese consumer will emerge as a great investment opportunity. Hopefully Australia will be one of the main beneficiaries from this, but if not then global tourism, education, property and premium consumer product providers will be profitable sectors to target.
This is part four and the final installment of a series on the big picture facing Australia’s most important trade and investment partner.
Part 1 – China, don’t become Japan
Part 2 – China’s investment cycle collapse provides strong signal to switch resource investment from stocks to bonds
Part 3 – China’s desperate debt fuelled gamble