The meteoric rise of China as an economic powerhouse over the past half century is nothing short of a remarkable story. Through the gradual liberalisation of its economy since the 1970s, China has successfully steered itself from being one of the world’s poorest nations to its second-largest economy today.

But with the apparent exhaustion of gains from urbanisation following decades of robust development, there was a need for China to explore new and more sustainable forms of growth in order to maintain its economic relevance for the coming generations. This eventually sparked the emergence of the New China Economy.

 

The “New China” vision

Envisioning a future of quality growth as opposed to just quantity, the Chinese government has committed itself, and continually pushed for structural reforms and policies to realise the country’s latest economic transformation – into one that is powered by domestic consumption and services. 

 

Fuelling the New Transition

In the wake of the Chinese government’s bid to shape its New China Economy, an evident change in China’s growth pattern began to transpire.

1.  Expansion of services and consumption

The service and consumption industries have witnessed a sharp expansion in recent years, and have rose to become amongst the top drivers of the country’s Gross Domestic Product (“GDP”).

Source: Bloomberg

 

2.  Rising income anchoring the shift in consumption pattern

Chinese household disposable income has increased from approximately 57% of its GDP in 2007 to roughly 62% of its GDP in 2016. This growth will likely remain well-supported moving forward as the Chinese middle class is expected to grow to 303 million by 2020.

As wealth increases, consumption is likely to follow.

Furthermore, China possess one of the largest consumer markets in the world; only second to the United States. From 2006 to 2016, the size of China’s consumption market jumped from USD1.4 trillion to a staggering USD6 trillion; which makes up more than 10% of the global consumption space.

Source: CEIC, Haver, UBS estimates

 

3.  Boom of the E-commerce industry

Internet penetration rate in China has vastly increased over the years – from 42% in 2012 to 56% in 2017, while 98% of the total internet users are using mobile internet.

Increasing internet adoption sparked a boom in China’s online retail sales, which grew by USD528 billion over the span from 2012 to 2017. It has outgrown the United States with a solid 32% compounded annual growth rate (“CAGR”).

As of 2017, China’s online retail sales market is larger than that of the United States.

Source: CNNIC, iResearch, Citi Research, US Commerce Department

 

4.  Artificial Intelligence (“AI”) capabilities

The integration and application of AI technology across industries is also becoming a pivotal part of China’s economic transformation.

China is currently ranked number 2 in terms of AI, behind the United States. Nevertheless, it has grown tremendously in recent years and is the leading holder of the most AI patents in the world as of 2018.

China aims to become a global leader in the field by 2030.

 

Source: South China Morning Post

 


An Emerging Theme for Investment Opportunities

While the dramatic, double digit growth pace as seen in the China of old is no longer – growth prospects for the future remains promising. To name a few, sectors including consumer staples, insurance, healthcare, and e-commerce are among the beneficiaries of the New China transformation.

Naturally, ongoing regulatory and policy implementations by the Chinese government – such as supply-side reforms and efforts to reduce reliance on a debt-fuelled economy – may pose a slight dampening effect on growth for the near term. However, it is important to note that this shift in economic priorities would serve as the necessary groundwork in ensuring China’s steady progress towards a healthier and more sustainable growth model.

China’s economic prowess is undeniable, and its influence over the global marketplace will only continue to grow from here. Treading ahead, innovation will remain at the heart of China’s expansion blueprint, as they continue to employ measures and resources to enhance its AI capabilities, as well as its service and consumption industries. Coupling this with the nation’s sheer population and rising purchasing power, the New China Economy presents itself as a potential bright spot for long term growth and an emerging investment theme that is worth considering.

 


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