PineBridge Investments, a global asset manager, has released a report "China Icebergs: Forces that Could Reshape the World", authored by the Economist Intelligence Unit (EIU), that examines the invisible trends and drivers underpinning China's future growth.
The EIU research says China is likely to become the world's largest economy by 2021 as three major factors or "icebergs" line up to converge domestically — with global implications.
The report forecasts the shift towards a consumption-led economy could happen by 2030. This transformation could mean slower overall economic growth, but that slowdown hides an expansion in scale as 480 million Chinese consumers enter the middle- and upper-middle class segments, altering the dynamics of consumption itself.
This report uncovers a range of investment ideas which are best capitalized through on-the-ground expertise. We believe that the recent raft of reforms will result in slower but a higher quality, more sustainable growth profile for China’s economy which leads to greater value creation for investors.”
This unprecedented development would be compounded by Chinese homegrown technological advances. China has been responsible for half the total increase in global patent applications since 1990, and the build-up of technology and data are transforming consumer behaviour and changing business and industries into new "smart-driven" models.
The report also looks at the country's urban growth. Nearly 300 Chinese cities have populations of 1 million or more people and many are catching up to top-tier mega-cities in terms of technology, commerce and infrastructure. The lower tier moving up in consumption power and consumer confidence could be analogous to another China, with its scale and technological capability, coming into the global economy.
Given their world-changing significance, the report notes that investors should put these icebergs on their radars. The report also says the private sector, which accounts for two-thirds of China's GDP and 80% of urban employment, is foundational to the country's next transformation. China's nominal GDP is estimated to more than double to $28.4 trillion (RMB 201 trillion) by 2030, with private consumption as a driver, accounting for 41.7%.
"Three powerful drivers will ensure that China will continue to be one of the principal growth engines of the world's economy in the years to come: the largest ever increase in the middle-income population - the increase itself is greater in size than the entire populations of the U.S. or Europe; the highest absolute spending in research and development spurring innovation and competition; and, broad-based participation in global capital markets with the Renminbi taking place alongside the world's major currencies. Investors need to cut through all the noise on trade and seize these opportunities," said Anik Sen, global head of equities at PineBridge Investments.
"This report uncovers a range of investment ideas which are best capitalized through on-the-ground expertise. We believe that the recent raft of reforms will result in slower but a higher quality, more sustainable growth profile for China's economy which leads to greater value creation for investors."
However, the report also notes risks to China's growth trajectory, such as continued trade and technology disputes with the US.
Open to foreign investors
Jason Wincuinas, senior editor, Thought Leadership Asia with the EIU, said: "China's scale is often overlooked in conversations about the country's economy. Multiplying any consumption metric by a billion or more consumers has many unforeseen implications.
"We've already seen how fast China became the world's largest auto market; now those same consumers— the ranks of which are still growing—are looking to electric vehicles. From a business strategist or investor point of view, that should prompt some serious investigation. The same kind of technological upgrade and consumption will play out in more segments going forward."
Wincuinas continued: "China's onshore markets are open to foreign investors and we believe that selectivity is key in finding the right companies to own, added Mr. Sen "This requires a tremendous amount of research and deep local knowledge. That is why together with our joint venture in China, Huatai-PineBridge, we are extremely well positioned with a combination of a disciplined investment process and a world-class risk management architecture."
PineBridge's joint venture in China, Huatai-PineBridge, is among the first movers in quant investing and is one of the largest active quant fund managers in the country.
The full report is available for download here.