5 key trends for China in 2018

Investing well starts with understanding trends, so focus on these five to navigate China in 2018.

15 Jan 2018

Upgrading, automating and creating the future:

Stepping into the future means applying innovation to create ever more inventive products - and that's exactly what Chinese companies are doing.

China leads the world in applying automation and robotics to manufacturing with 451,000 robots installed at the end of 2017, and an estimated 950,000 by 2020.

By applying robotics and innovating their processes, Chinese companies are delivering sophisticated products, like drones, tech-augmented cars, and smart delivery systems, that are creating value in sectors such as autos, electricals, and logistics.

Total Installed Robots by Country, 2015-2020(f)

Source: International Federation of Robotics, 2017

New economy sectors in the lead:

Reforms and consumer demand propelled rapid annual growth of 8.0% in China's services sector vs. 6.9% for the whole economy in 2017. But this is a longer run story because China's services sector (50.2% of the economy in 2016) has huge room to grow as it catches up with developed nations.

With this in mind, plus China's service-economy reforms, there are strong future prospects for 'new economy' companies in services-linked sectors like healthcare, IT, education, and consumer.

Services as % of the Economy, 2016

Source: World Bank Development Indicators, 2016

Building China's new labor advantage:

China's past success has been built on its workforce and the future will be no different. However, China's previous advantage in low-cost, unskilled labor is shifting to well-qualified graduates trained in science, technology, engineering and manufacturing (STEM) subjects.

Indeed, some 4.7 million students graduated in (STEM) subjects in 2016, compared with 568,000 in the United States, according to the World Economic Forum.

And it's not going to stop there, the Economist Intelligence Unit forecasts 48 million STEM specialists in China by 2030 - equivalent to the population of Spain - and that compares with 2.5 million forecast for Japan.

This backbone of highly-qualified workers will support innovations in sectors like pharma and tech and the wider economy in the future.

Total STEM Graduates 2016

Source: World Economic Forum, 2016

Opening the financial sector:

China is intent on financial sector reform and overseas investors are responding. Stock and Bond Connect programs have made domestic markets more accessible than ever and overseas institutional players boosted their onshore bond holdings 25.1% y-o-y to RMB 974 billion (USD 154 billion) at the end of 2017, according to Chinabond.

Further changes, like the opening of domestic banking sector to foreign investment, plus the impact of MSCI's inclusion of 222 A-share stocks in its benchmarks from June 2018, means further attractive opportunities for both overseas and domestic investors in 2018.

Reshaping world trade through Belt & Road:

Cutting the average travel time from Shanghai to Rotterdam from 30 days to 18 days is no mean feat, but that's exactly what China is doing by building new road and rail links as part of Belt & Road. The initiative intends to reshape world trade, bring trading partners closer into China's orbit, and give Chinese companies overseas bases by investing an estimated USD 800 billion to create a global network of ports, roads, rail lines and pipelines.

And that's not only a boost for the Chinese construction and materials companies building the infrastructure, but also for the manufacturing and services companies using the new trade routes to springboard into new markets.

These trends will shape China in 2018 and offer a compelling range of themes for investors. But there's a bigger picture too.

As China expands it's going to have a global impact, contributing an estimated 35.2% of total global growth between 2017 and 2019, according to World Bank estimates.

Prospects like this, plus the deep-lying transformations happening right now, make China, now more than ever, too big to ignore.

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