The Connected Billion: Playing China’s Online Revolution Post COVID-19
China’s impressive growth has attracted investors during the past decades. As China’s economy matures, growth opportunities in traditional sectors have become scarce. However, other areas of investment are still present. In parallel to what the USA experienced in the 1990s and early 2000, there has been a massive shift of wealth generation from brick and mortar businesses into online business models.
Instead of only looking at the economy’s overall growth figures, investors should put their focus on both the growth of internet penetration and the impressive rise of the Chinese consumer. As the Chinese Government continues to make consumption a priority to fuel the transition of its economy from export-led into a service-oriented economy, China’s consumer base has experienced years of high wage growth, migration into cities, and an expansion of internet connectivity.
Thanks to all of this, the clear outcome is that China’s middle class is spending time and money on goods and services, spanning travel and leisure, social media, e-commerce, gaming, and health and wellness. All of this was a reality pre-pandemic times. With the worldwide pandemic speeding up the transition to online in almost all aspects of life, this will only fast-track even further the online revolution in China.
In this article, we look at how focused thematic investment approaches like the BITA China Internet Giants Index are positioned to capture this trend.
Key Stats don’t tell the complete story
China is an economy with a massive population of 1.3 billion people that has been growing in a sustained fashion over the last 20 to 30 years. As per figures provided by the World Bank, from 1990 to 2018, the Chinese economy exhibited a CAGR (compound annual growth rate) of about 13.8%.
With the growth of the Chinese economy, urbanization has been expanding rapidly. According to China’s National Bureau of Statistics, by the end of 2018, the permanent population of urban areas in China reached 83.1 million, an increase of 17.9 million from the previous year. On a per-capita basis, a Chinese citizen is 10 times better off today than in 2000, with GDP per capita growing from $959 to $9,770.
Albeit at a slower rate, the purchasing power of the Chinese middle class continues to rise. According to the 2018 Global Wealth Report, China’s contribution to global middle-class growth is the largest in the world.
While these are interesting figures to follow, the key transformation is happening beyond its government-controlled walls. As the Chinese middle class starts to account for half of the global middle class, local internet-focused companies are experiencing a windfall.
The China Internet (r)Evolution
With greater urbanization and disposable income, China’s emerging middle class has become increasingly connected online. By the end of August 2019, internet penetration in China has reached 61.2% [1], rising roughly 20% in a decade, having still further room to grow compared to the US, which stands at 87% [2].
China’s substantially larger population and eager adoption of new technologies have resulted in 3x as many internet users, and 7.5x amount spent on mobile transactions compared to the US [3]. By the end of 2023, China is expected to have almost one billion of its citizens connected to the internet.
Besides, Chinese consumers have shown quick adoption of new technologies. This is reflected in the rapid 4G adoption rates, providing the support for data-intensive media consumption, chat features, and mobile payments. This is partially explained by ‘leapfrogging’, which enables developing markets to quickly adopt the latest technology, rather than needing to replace well-entrenched infrastructure. For instance, Chinese consumers have leapfrogged credit cards, spending over $15 trillion in mobile payments in 2017, compared to $2 trillion spent in the US [4].
The proliferation of E-Commerce in China also shows there is potential for substantial continued growth in the internet sector. China’s E-Commerce market size surpassed the US for the first time in 2014, and its total retail sales surpassed those of the US for the first time in 2017.
Chinese retail websites sold $1.3 trillion worth of goods in 2018, a 23.9% year-on-year increase. Finally, online shopping accounted for 23.6% of total retail sales in 2018.
Government support for Internet Services
A common theme among high-growth potential sectors in China is that the government helps to accelerate their expansion through different supportive policies. With Internet Services, the government has set a series of measures supporting its growth, including internet infrastructure as well as technological innovation. Key national strategies like the Made in China 2025 (MIC), BeIt and Road (BRI), Broadband China, and Internet Plus initiatives, all reinforce the sector’s growth by facilitating a greater development of internet infrastructure.
Furthermore, Chinese communications firms often benefit from protections against foreign competition, which helps build their scale in China before competing internationally. International expansion is inexorable given that many firms have now built substantial scale, and China is rapidly becoming a Global Internet Service Leader.
Companies like Badoo, Tencent, Alibaba, or NetEase have become not only local but global technology giants. And while their US counterparts struggle to grow their market shares in the US, these firms have still massive growth opportunities within China and its surrounding emerging markets.
Such is the case of Tencent, which has acquired stakes in nearly 300 companies across developed and developing markets in the past 6 years, including Indonesia’s e-commerce giant, Shopee, and the US creator of ‘Fortnite’, Epic Games.
Key Takeaways
China’s Internet segment is placed at the intersection of a variety of powerful trends, including rising consumption and the development and adoption of advanced technologies like social media, gaming, and mobile payments. The opportunities at online services in China seem to be limitless, creating massive potential for outsized returns. It is noteworthy to reiterate that this transformation was already taking place before anybody contracted COVID-19. What implications the pandemic will leave on this online metamorphosis? It has only accelerated it.
But, how can international investors and traders profit from this seismic change?
Until now, traditional investment allocations in major benchmark indexes such as the MSCI China or the China A-50 index have been providing investors with an unfocused exposure, as much of the capital invested through these vehicles is allocated into traditional sectors such as brick and mortar banking.
With the emergence of thematic investing and carefully designed thematic indexes, investors can now play this trend in a significantly more focused manner.
By applying strict research methodologies and focusing only on relevant high-growth internet firms, a thematic index makes up a great and uncomplicated alternative to access this market.
The BITA China Internet Giant Index (BCINTG) provides investors with a focused exposure to the Chinese internet. The index outperformed the SPY in 2020 by an estimated 54.6%. The index has been constructed based on an objective, transparent methodology that identifies companies whose revenues and activities are directly exposed (generate most of their revenues) to the online Chinese internet market.
To learn more about BITA’s real-time data products visit our website at www.bitadata.com or contact us at info@bitadata.com.
References:
[1] CNNIC, The 44th Statistical Report on the Development of China’s Internet, 31/08/2019.
[2] Pew Research Center, World Bank and US Census Bureau as of 31/12/2018.
[3] KKR, “China: A Visit to the Epicenter,” Aug 7, 2018; and United Nations ITU, Data as of Jan 27,2019.
[4] Wall Street Journal, “Alibaba and Tencent Set Fast Pace in Mobile-Payments Race,” Sep 22, 2017; iResearch; Forrester Research.
[5] CNNIC, The 44th Statistical Report on the Development of China’s Internet, 31/08/2019.
[6] Data from Pew Research Center, World Bank and US Census Bureau as of 31/12/2018
[7] National Bureau of Statistics in China, “National Economic Performance Maintained within an Appropriate Range in 2018 with Main Development Goals Achieved” 1/21/2019. Note: Figures converted from Chinese Renminbi to USD as of 12/31/2018.
[8] U.S. Department of Commerce, “Quarterly Retail E-commerce Sales 4th Quarter 2018” 13/Mar/2019.
