The most recent census in China pointed to the lowest birth rate since the upheaval of the Great Leap Forward in the late 1950s and early 1960s. “While rising living costs, unaffordable property and uncertain career paths are often cited as major reasons for limiting the size of the families, the biggest factor is the rapidly rising dependency rate,” said Andrew Lee.
Life may often be a struggle for young adults in China. Andrew said average married couples have disposable monthly income of around $1,000, while facing property prices of nearly $6,000 per square metre in Shanghai, based on figures from the National Bureau of Statistics of China. If that is not enough to make them wary of starting or growing their family, there is a lack of affordable social care options, meaning elderly relatives need to be looked after. Andrew Lee also cited the “ultra-competitive academic system” as a further disincentive to having children.
The authorities are aware of growing disquiet and are seeking to address the key challenges of housing, health care and education, which are becoming known as the “three mountains”. Efforts to calm speculative pressure in the property market have caused some investor concern about a “Chinese Lehmann” situation. Andrew is hopeful, though. “In our view these concerns could be overblown, because China has demonstrated a solid track record in managing corporate collapses in recent years,” he said. “Higher quality developers with robust balance sheets are likely to come out of this regulatory cycle a lot stronger,” he added.
Health care costs are being addressed by increased state funding for treatments, with ambitions for a large-scale reform of the pricing of medical services. Reforms of the education system are also being enacted, specifically with the aim of alleviating the pressure on children and parents to commit time and money to after-school tutoring.
More widely, the authorities have engaged in regulatory action designed to clip the wings of major players such as Alibaba and Tencent. A central rationale is to facilitate entrepreneurship and innovation by small and medium-sized businesses (SMEs) through a reduction in the dominance of potentially monopolistic firms.
These tensions and changes are creating investment opportunities.
In the renewable energy sector Andrew pointed to the country’s domestic access to core raw materials. “Every battery maker can enjoy strong cost competitiveness against global peers because the country has a vertically integrated value chain,” he said. In the real estate sector, “property management is an up-and-coming sub segment that tends to be asset light and less cyclical with recurring cash flows,” he noted. There is also room to expand into property brokerage, financial services, public space utilisation and housekeeping services.
Chinese contract research organisations “are growing very nicely,” Andrew said. “This is not only thanks to the increasing investment in pharmaceutical and health care technology globally, but also these Chinese companies are supported by a strong talent base, increasing technological edge and cost advantages.”
Fundamentally Andrew sees a strong picture. “Despite all the macro noise and challenges, I think that there are many very attractive investment opportunities in China. We just have to be very selective,” he said.
Interested in finding out more?