In the wake of China’s reopening after a prolonged period of COVID-19 related lockdowns, members of our VanEck Emerging Markets Equity team embarked on a research trip spanning several Chinese cities. Our aim was to deepen our understanding of the evolving macroeconomic landscape and to further explore the underlying investment opportunities in the post-pandemic recovery era.
While we recognize that the recovery momentum has disappointed compared with initial expectations, we believe the country currently offers reasonable prospects of economic acceleration in a world where growth is more challenged, as interest rate hikes start to bite and inflation remains stickier. We are very mindful of some longer-term structural top-down challenges, but remain excited about several pockets of growth in China including green energy, industrial automation, healthcare and quality consumption. This is aligned with our perception, reinforced by this visit, that China’s policy makers are currently prioritizing more gradual higher quality growth over rapid broad-based expansion, which suggests that the recovery will be uneven across sectors with some sectors expected to experience a faster pace of growth over others.
In this context, our investment approach becomes even more critical. We focus on careful selection, long-term trends, and bottom-up structural growth stories. Our trip confirmed that these strategies are crucial for identifying the best investment opportunities in the rapidly growing sectors and our meetings with company leaders, industry experts, and local investors only strengthened our understanding of China’s evolving landscape.
In this blog, we:
- Highlight the significance of our investment approach that focuses on careful selection, long-term gains, and bottom-up growth stories, especially in this evolving economic landscape.
- Explore the budding opportunities in rapidly-growing sectors like green energy, industrial automation, and healthcare, all being buoyed by policy support and demographic trends.
- Provide insights into the future of consumption in China, including the challenges and potential presented by evolving consumption patterns, income distribution, and strengthening social safety nets.
China’s Green Energy Revolution
One striking observation from our journey through China’s growth sectors was the impressive advancement towards green energy. Renewable energy projects and new energy vehicles (NEVs) are on the rise, particularly in top-tier cities. In these top-tier cities, NEVs make up nearly 50% of new sales, a development fostered by government policies, tech improvements, a well-established infrastructure, and evolving consumer preferences.i
Chinese homegrown brands such as BYD, Li Auto, and Nio have not only kept pace, but have also carved their niche in the NEV market. These brands have captured consumer interest with their technological advancements and are often preferred over global brands like Tesla. Consequently, China has surpassed Germany and Japan to become the world’s largest car exporter. This bustling market, however, is highly competitive. Yet, we continue to look for lucrative, long-term opportunities within the renewable supply chain.
Global passenger EV sales by market
Source: Bloomberg; As of December 31, 2022. Past performance is no guarantee of future results.
In the realm of green energy, China’s investments in solar power have surged dramatically, boasting a year-on-year increase of about 204%.ii This surge aligns with China’s aim to achieve energy self-sufficiency and net-zero emissions by 2060. With more than 70% of its oil and 40% of its natural gas being imported, China is determined to trim down its dependency on external energy sources and mitigate pollution.iii
This commitment to sustainability has resulted in an ambitious target for solar and wind energy: China aims to reach a capacity of 3.3 terawatts by 2030, substantially exceeding its current goal of 1.2 terawatts.iv One company that stands to profit from this upward trend is Sungrow Power Supply Co. Ltd., a component of our investment portfolio (portfolio weight of 1.6%*). Sungrow, a leading global manufacturer of solar PV inverters and wind power converters, is predicted to secure 39% of the global solar inverter market share by year-end.v
Despite temporary price headwinds, we believe in Sungrow’s potential for long-term growth. As a leading global inverter solution supplier, it is well-positioned in the era of increasing clean energy adoption and the global march towards a sustainable future.
Embracing the Future: Industrial Automation, Digitization, and Robotics
In the pursuit of high-quality growth, China is shifting its focus to areas like industrial automation, digitization, and robotics. This direction aligns well with the country’s demographic trends, and the government is supporting the effort by providing subsidies and potential tax breaks to domestic high-end manufacturing companies. This support encourages technological innovation, fostering a favorable growth environment for companies active in the fields of industrial automation, robotics, semiconductors, and software development.
One such beneficiary of these trends is our portfolio holding, Shanghai Baosight Software Co. (portfolio weight 1.26%*). Baosight is a software company listed on the China A-Share market. Their primary focus is to bring efficiency to China’s steel sector through digitization and software-enabled processes. Born out of Baowu Steel, the country’s largest steel producer, Baosight’s largest customer remains its parent group company.
Currently, there’s a significant emphasis on state-owned enterprise (SOE) reforms (Baowu is an SOE). The aim of these reforms is to enhance efficiency and transparency. This calls for further automation and digitization, which bodes well for companies like Baosight. Industry consolidation trends are strengthening Baosight’s dominant position, increasing its economic moat.
Another key player in our portfolio is Shenzhen Inovance Technology (portfolio weight of 0.59%*). Inovance is a domestic leader in industrial automation, robotics, and NEV components. Despite a challenging environment, the company is well-positioned to grow across multiple sectors, with management aiming for 20%-40% growth this year.
Looking ahead, we believe that industrial automation is vital for pushing China up the value creation curve. This is crucial to overcome challenges associated with the middle-income trap and demographic shifts.
Source: VanEck. Left: Deputy Portfolio Manager Ola El-Shawarby at Inovance facility.Right: Deputy Portfolio Manager Ola El-Shawarby along with Senior Analyst Yi Rong at Inovance facility.
The Evolving Healthcare Sector and Rise of Innovative Therapies
In light of the growing discussion around China’s shifting demographics and aging population, we anticipate a surge in demand for healthcare services, bolstered by an increase in healthcare spending. This trend is expected to drive considerable growth within China’s healthcare sector. Although the public sector continues to dominate certain healthcare areas, we’re optimistic about the potential presented by the burgeoning demand for innovative therapies.
For instance, Wuxi Biologics (portfolio weight 1.06%*) stands as a formidable player in this sector. As a leading Contract Development and Manufacturing Organization (CDMO), Wuxi Biologics offers outsourcing services to biopharma companies worldwide. The company, which has been expanding its research and manufacturing capabilities domestically and abroad, is predicted to have a compounded annual growth rate of over 25% in the next two years. Thanks to its successful execution track record and expanding customer and drug portfolio, Wuxi Biologics is primed to capitalize on the escalating demand for biologics.
Another company set to benefit from increased healthcare spending is Yifeng Pharmacy (portfolio weight 0.56%*), a growing retail pharmacy chain. Thanks to increased demand for prescription drugs and market share gains, Yifeng has enjoyed steady growth. This trend is reinforced by the move to transition prescription drug sales away from hospitals.
The Future of Consumption and Consumer Behavior in China
As we look towards the evolving consumption landscape in China, we see an opportunity for long-term growth despite a weaker than expected near-term recovery. Chinese households reportedly saved a record $2.6 trillion in 2022, reflecting an 80% increase from 2021, according to the People’s Bank of China.vi While it was initially predicted that consumer spending would surge once COVID-19 restrictions were lifted, factors such as an unsettled property market and weaker employment conditions have dampened consumer confidence and stifled ‘revenge spending’.
China’s consumer spending is increasing, especially in high-income households
Source: HSBC Research, As of April 2023. Past performance is no guarantee of future results. Not intended as a forecast or prediction of future results. Actual future consumer spending in China is unknown.
However, we remain optimistic. Over time, as consumer confidence begins to recover, we expect China’s consumption-to-GDP ratio, which currently lags behind the global average, to reveal its immense potential. This potential is tied to improving income distribution and the strengthening of social safety nets.
Shaping Investment Around Evolving Consumer Preferences
Changes in consumer preferences underscore the need for selective stock picking, focusing on companies that stand to benefit from China’s evolving consumption patterns. For example, the Chinese food service industry is projected to grow at a compounded annual growth rate of 7.9%, putting Yum China (portfolio weight 0.69%), an operator of chain restaurants in China, in an excellent position for growth.vii
Yum China has demonstrated resilience amid COVID-19 challenges and successfully expanded its store base by leveraging the growing demand for delivery and takeout services. We’re enthusiastic about the continued improvement in profitability and margin trends, along with the high potential for expansion and scalability in new cities across China. With a robust digital presence and a focus on customer engagement, Yum China appears well-positioned to capture more market share while maintaining strong profitability trends in the future.
Navigating China’s Evolving Economic Landscape
In this blog, we delved into the landscape of investment opportunities in China, with a spotlight on how the country’s focus on high-quality growth and structural changes is creating myriad opportunities in diverse sectors. From our on-ground research and macro outlook, we’ve identified three key areas: green energy transition and NEV growth, industrial automation and digitization, and the evolving consumption and healthcare landscapes. Amid these shifts, the VanEck Emerging Markets Fund (GBFAX) offers access to these structural growth opportunities in China, in addition to the broader emerging markets opportunity set. With a nuanced understanding of the market and a bottom-up investment approach, the Fund provides a potential avenue for investors looking for idiosyncratic growth exposure in emerging markets. Ultimately, the trip underscored our conviction that China’s selective and curated growth story remains robust, favoring discerning investors who can navigate the uneven pace of sectoral recovery.
Important Disclosures
i China Overtakes Japan As The World’s Biggest Exporter Of Passenger Cars.
ii China Triples Solar Investments as Clean Energy Push Accelerates.
iii HSBC Research Report: Asia’s Game Changers published April 2023.
iv China may reach energy self-sufficiency by 2060.
v Macquarie Research – Global Energy Storage published May 2023.
vi Chinese savers stashed away $2.6 trillion last year but property crash will cool ‘revenge spending’.
vii China Food Service Market Report 2022.
* All portfolio weights are as of May 31, 2022.
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