When Citi's chief economist for China, Li-Gang Liu, fronts a breakfast seminar in Sydney on Tuesday he will provide a timely reminder of the growing purchasing power of the Chinese consumer.
This is a phenomenal tidal wave that should not be ignored by investors. China's consumers are a powerful force being factored into the strategic asset allocation of international fund managers.
Li-Gang says China's economic rebalancing has started, albeit at a slow pace.
Last year consumption in China contributed more than 60 per cent of GDP growth and Li-Gang says it will continue to rise steadily between now and 2020.
He says over the next five years China's private consumption could rise to about $US13.7 trillion in purchasing power parity terms making it one of the largest consumer markets in the world.
Li-Gang's equity research colleagues in Australia have identified about a dozen companies with business from China but only four of them have a "buy" rating.
Citi's top picks are Star Entertainment, Crown Resorts, AMP and Village Roadshow. Several highly rated companies made Citi's China business list including Treasury Wine Estates and Sydney Airport. But they have "sell" and "neutral" ratings respectively.
Food is identified by Li-Gang as one of the fastest growing imports over the past few years. That trend is set to continue.
When Citi's local analysts screened ASX listed food companies for total China revenue (in brackets) there were five which stood out: Dongfang Modern Ag (100 per cent), Blackmores (40 per cent), Fonterra (11 per cent) and Wellard (5 per cent).
Another five companies reported earnings from China and other Asian countries in excess of five per cent. These were Australian Agricultural Company (31 per cent), GrainCorp (24 per cent),
Bellamy's (11 per cent), Bega (10 per cent) and A2 Milk Company (6 per cent).
Investors wanting to gain a granular understanding of the Chinese consumer and what they are thinking need look no further than
the latest survey from Boston Consulting Group published on Monday.
BCG has a narrower definition of the consumer economy in China than the one used by Li-Gang. It says
the consumer economy will expand by about half to $US6.5 trillion by 2020.
BCG describes China's consumer economy as being comprised of two tiers – the upper middle class and the middle class and affluent.
It says that
by 2020 the number of upper middle class and affluent households will have almost doubled to 100 million and will account for 30 per cent of the urban population.
The spending intentions of this group remain constant and the
spending growth rate is a staggering 17 per cent.
About 30 per cent of these consumers are planning to spend more this year, according to the BCG survey.
The survey does not hide the fragility in the Chinese economy. The share of households in which income growth exceeds 10 per cent has dropped from 38 per cent to 28 per cent.
Also, job worries and anxiety about the future are rising. The share of those who are worried or anxious has risen from 20 per cent to 25 per cent and 22 per cent to 28 per cent respectively.
The most interesting aspect of BCG's research is
the growing consumption power of the younger generation in China. Those aged 18 to 30 will make up more than a third of the urban population by 2020.
Their consumption is growing at 14 per cent a year, twice the pace of the last generation (those older than 35). The younger generation's share of consumption is projected to rise from 45 per cent to 53 per cent by 2020.
BCG says companies selling into China need to be strategic in the way they pick targets. Also, they should be aware of the
growing dissatisfaction among young consumers of issues such as food safety, health care and the environment.
For example,
63 per cent of those aged 18 to 25 are dissatisfied with food quality. That augurs well for the companies selling food to China.
The impact of China's consumers on investment portfolios has been recognised by international fund managers.
Last week, when Pieter Fourie, head of global equities at Sanlam Private Wealth, conducted a roadshow for the Clime International Fund he stressed the importance of picking US listed stocks with exposure to Chinese consumers such as Yum! Brands.
