The China (Consumer) Syndrome
More Pay = More Profits for Investors
By Jeff D. Opdyke
Dear Sovereign Investor,
Would an extra $29 a month improve your lifestyle?
I’d bet the answer is no. For the average American family, $29 is just 0.8% of monthly income. It’s $3 less than my wife I spent on lunch at a local Mexican eatery a few hours before I sat down to write this.
In short, it’s a fairly trivial amount.
But if you live in China’s Yunnan Province, in the city of Kunming, and you’re an employee at the KFC on Teng Bai Road near Yunnan University, $29 means something. It’s the size of the pay raise the fast-food chain gave you and your fellow employees over the summer … and it represents 17% of your monthly income.
For the average American, that $29 is the equivalent of a $570 monthly pay raise.
So let me ask you the question a different way – would 17% more money each month improve your lifestyle?
Bigger Paychecks Coming Today…
China’s rising wages is a topic I’ve written about in the recent past.
But I’m coming back to it today – and from an on-the-ground perspective – because the issue defines some of the most profitable opportunities for investors over the next couple of decades.
It’s also an issue China is now addressing as the country assembles its 12th Five-Year Plan. That’s China’s roadmap to societal improvements and economic growth through 2016. And this latest plan, the details of which will emerge next spring, is certain to push wages higher by 15% to 25%, maybe more, in each of the next three to five years.
China’s leadership is hell-bent on creating a more-balanced economy by downscaling dependence on exports. Chinese leaders want to spur domestic consumption so that the economy is better able to withstand global shocks that disrupt trade.
And lawmakers know that if you put more money in workers’ pockets, those workers will spend more money
This year so far, provincial governments across nearly the entire country have raised minimum wages, typically by between 20% and 30%. With the Five-Year Plan that’s now in the works, paychecks in China are set to grow even larger, quickly.
But look at how income has grown in China in recent decades. (Visit this link to see the surge in urban and rural income.)
Who wouldn’t want their income to grow at such a rapid clip? (The date ranges are different because I don’t have comparable data for rural income, but the same trend is apparent over a shorter time span.)
Let’s put that in perspective: China’s lowest-paid workers (and our urban-based KFC worker falls between “lowest income” and “middle income) have seen their pay rise by an average of 10.7% over the last two decades. American workers – starting from a larger base, granted – have seen per-capita income rise 1.8% annually since 1988.
But those are just numbers. As I said, this dispatch is really about looking at income from an on-the-ground perspective. After all, it’s the people behind those numbers that bring to life an economy and the companies.
So, let’s hang out with that KFC worker to gain a better understanding of where the money is going so that we, as investors, can begin to see potential long-term winners in China’s ascendancy …
China’s Manifest Destiny
Kunming is the capital of Yunnan Province, in China’s deep south, where the country presses into Myanmar, Laos and Vietnam.
This is a “second-tier city,” meaning it’s not an eastern seaboard megalopolis like Shanghai, Beijing or Guangzhou. Kunming has roughly 3 million people in the urban area and ranks as China’s 24th largest city. But with its location so far inland – about 1,000 miles from Guangzhou, on the Pearl River delta – Kunming has largely been an economic afterthought.
Today, second- and third-tier cities are the place to be.
China is driving growth in these all-but-forgotten towns through policies and incentives – like minimum wages strategically lower than on the east coast – that encourage companies to locate manufacturing plants inland, thus, spreading the wealth across the country. In effect, China is implementing its own Manifest Destiny.
In response, companies that serve consumers are pushing westward, too, reaching hundreds of millions of new customers who have an increasing amount of money to spend.
These include the obvious arrivals, like retailers, but also apartment-tower developers, shopping-mall owners, modern hospitals and neighborhood pharmacies, and new, local airlines to serve gleaming new airports.
There are the new-car and motorbike dealerships and the new highways and toll roads to get around town … or the country.
And, of course, water companies and natural-gas providers are arriving and running new pipelines to parts of the city previously unserved.
Arriving as well: hygienic, hypermarkets and department stores (some foreign; many local) that are replacing street-side wet markets and barebones stalls. They stock fresh produce grown by Chinese agribusinesses and packaged goods like infant formula, heat-and-eat noodles and bottled teas … all made in China, many of which are national brands, and some of which are going regional and global.
This trend toward increased consumerism contains untold profits.
China’s Generation of Spenders
With his $29 monthly pay raise, our KFC worker now earns 900 yuan a month, or about $135. At that level, he brings home 70 yuan (US$11) more than the minimum wage.
As a service-sector worker, though, he still earns less than Yunnan’s urban-area per-capita income of 1,586 ($239). But he has built his lifestyle on a smaller salary and now, with 17% more income, he has money to either increase his savings or increase his spending.
Chances are he spends.
He is part of the Little Emperors, a generation of coddled kids, mainly boys, created in the 1980s and ‘90s by China’s one-child policy movement. Since girls marry and end up helping a husband’s family, Chinese couples, who could only have one child as a result of this policy, got rid of baby girls and kept the boys.
Those are some spoiled kids today. Like America’s Baby Boomers, they’ve always gotten what they want. And they know parents and grandparents will leave their wealth to this one child.
Thus, our KFC worker is eager to spend. And in the new China, temptations abound.
A Day in the Life of the New China Consumer
Two miles from his work: New World Department Store’s Kunming location, a mall-like store that attracts the young and trendy.
He’s meeting his fiancée in the basement there to grab dinner in the café and to shop at the supermarket. But first, he has two quick errands. He stops to deposit his paycheck in his first bank account, at the China Construction Bank branch on Qingnian Rd, and then ducks into the Li Ning outlet a few blocks farther down. He has wanted a pair of tennis shoes made by China’s most famous athletic-shoe firm, and his income now allows for the splurge.
He knows he has plenty of time to shop because his fiancée said she was stopping by the Shiseido cosmetics store a mile to the west. Like so many working Chinese women, her discretionary income is growing, and much of it goes to make up, particularly Japanese brands.
Our chicken-fryer has found his shoes and pays for the purchase with his new China UnionPay credit card, a financial service new to him. Within a decade, he’ll be part of the largest base of credit-card users in the world.
The Grocery List
After a quick bite in the café, our KFC worker and his fiancée stroll through the supermarket in the basement of the department store to pick up a few items before heading to their apartment.
When they were small kids shopping with their parents, they would have stopped at a much-smaller market stall or a no-frills convenience store – and in both instances the selections would have been minimal and the branding basically non-existent.
Today, they take for granted the ability to buy anything they want at stores stocked with branded goods from around China, around Asia and around the world.
On their grocery list:
– Want Want Rice Crackers, one of China’s most popular snack crackers, made by Shanghai’s Want Want Holdings.
– Vitasoy chocolate soy drink, a product made by Hong Kong-based Vitasoy International Holdings. This drink is popular among Chinese who are adding more-nutritious foods to their diet as their incomes increase – and dairy and soy are two of the fastest-growing segments.
– Sweet corn, grown by China Green Holdings, one of China’s premier emerging agribusiness leaders. Rising incomes are also allowing Chinese consumers to buy better produce.
– A case of iced jasmine green tea. Ready-to-drink tea is the fastest growing soft-drink segment in China. This couple grabs a brand produced by Japan’s Ito En Ltd., which has been selling into China for three decades and is seeing its sales take off these days.
Bountiful Ways to Profit from
Every company I mentioned is publicly traded in Asia, though I’m not saying any are buy recommendations at the moment.
I’m using them to illustrate my broader point: China’s expanding consumerism, fueled by the government’s push to increase salaries, provides savvy investors numerous profit opportunities. You just have to stop and think about how you would spend more money, if you had it, and where to find the companies in Asia that are the beneficiaries of that spending.
The story I just laid out represents maybe an hour in an average Chinese worker’s day. These sorts of consumer decisions happen all day long, and touch everything from travel to healthcare, banking to recreation.
They are exactly the kinds of opportunities I continually search for as an investor in Asia, and as the writer of the Emerging Market Strategist investment service. Based on what I’ve seen firsthand in my travels across Asia in the past decade, investors without exposure to Asia’s growing middle class – particularly the Chinese middle class – are missing the greatest investment story in a generation.
Until next time, keep a global view …
Jeff D. Opdyke
Editor, Emerging Market Strategist