Consumers – in the driving seat

Buying habits of consumers are becoming more sophisticated.

China has the world’s largest population, and prioritising consumption-led growth to drive economic development should provide tailwinds for the consumer sector.

Aspirations for a better life penetrates all aspects of the 1.4 billion consumers’ lives as they continuously seek to upgrade their standard of living.

The two major trends - the rise of China’s middle class and digitisation - are shaping the future of the consumer sector.

The rise of China’s middle class

Companies that tap into the consumption upgrade trend – where consumers increasingly demand higher quality and more competitively priced goods and services - have proven to be able to stay ahead of competition.

This trend has altered the landscape for the consumer-discretionary products such as home appliances, which have traditionally been dominated by domestic brands.

We believe the next phase of growth should come not from an increase in sales volumes but upgrades to the product mix by catering to the Chinese consumer’s increasingly sophisticated buying habits.

At the same time, consumers’ increased awareness of product safety and quality is encouraging Chinese companies to invest more in product design, leading to a premiumisation of the sector.

Similarly, Chinese brands are enjoying more recognition these days and that leads to more demand from domestic consumers.

Digitisation influences consumption behaviour 

The other major trend is digitisation, where big data, the Internet of Things and artificial intelligence are some of the innovations that allow companies to explore new ways to engage customers.

For example, a smart home appliance maker that launched in 2014 is investing to develop next-generation robotic home cleaners and a data analysis platform.

In a sign of investor confidence in its prospects, the company managed to raise 4.5 billion yuan in its IPO for the Shanghai STAR board amid the Covid-19 pandemic.

But we stress that not all consumer companies will benefit equally from China’s economic transformation.

We think retailers are likely to bear the brunt from this transformation.

As more and more companies turn to warehousing and delivering their goods, together with the ease of setting up online shops, retailers are likely to take a hit from China’s shift towards technological innovation. 

Financials - not all gloom and doom

We think financial institutions’ role in the Chinese economy will change as the development of capital market continues.

While policy development could weigh heavily on the traditional banking sector, the likely expansion and further digitalisation of the consumer sector should provide some new opportunities for Chinese lenders.

China’s banking sector has traditionally played an outsized role in financing China’s economic activities, in part due to the country’s local capital markets being less developed than their Western peers.

However, Beijing’s push to liberalise them could offer companies, especially small- and medium-sized ones (SMEs), better access to tap into capital markets to support their growth.

Therefore, in the structural sense, we think that the traditional banking sector’s role in financing growth will be significantly reduced or gradually replaced by more efficient and sophisticated capital markets.

However, for the foreseeable future, their margins are likely to be remain under pressure from the current low interest rate environment

Despite this there are still bright spots for financials.

Chinese banks are extremely well capitalised and the non-performing loans (NPL) ratio is low in comparison with other banks in the world.

This is despite the central government’s recent call for Chinese banks to perform “national duties” by providing cheap financing to SMEs as they recover from the pandemic outbreak.

Chinese banks also enjoy wide access to a huge and growing consumer sector.

While retail banking is still in its nascent stage in China, we believe that banks should find a deep pool of increasingly sophisticated customers open to fee-based services such as credit cards or the larger wealth-management advisory services.

At the same time, the rise of digital banking services and fintech open new ways for banks to provide financial services and to expand into new markets.

Prospects for non-bank financials are also looking up.

Insurers can benefit from China’s pension reform as Beijing unlocks China’s trillion-dollar worth of pensions monies.

Going back to our theme of technological innovation, we believe that the use of fintech will help insurance companies improve efficiency, reduce costs and strengthen risk control.

For brokerages, while the opening up of the market could bring about increased competition, this should also make it easier to separate winners from the laggards.

With an ageing population one potential winner alongside financials could be the healthcare sector.