The news cycle this fall was dominated by the change in leadership of the Chinese Communist party ahead of next year’s government transition. The initial signs emerging are encouraging and support our thesis about China’s development into the next decade.
Most reports highlighted the efforts that incoming President Xi Jinping and Prime Minister Li Keqiang are expected to make on economic and judicial reforms along with initiatives to reduce corruption. Additionally, the incoming leadership provided clear signals with regards to the type of growth they want to see emerge as China’s economy matures.
In the first politburo meeting chaired by Xi Jinping on December 5th, the minutes discussed the importance of maintaining the continuity and stability of macroeconomic policies. Additionally, they highlighted the need to (i) grow domestic demand by accelerating consumption growth and stimulating investment growth and quality; (ii) promote agriculture production and efficiency with increased policy support; (iii) encourage M&A in industries with overcapacity; and (iv) support the development of small and medium sized enterprises.
We believe this is a further signal that China’s future growth will rely less on exports and infrastructure investment and more on consumer spending and services. A study by Gan Li, a professor at Southwestern University of Finance and Economics and Texas A&M University, claimed that China’s urban unemployment rate is 8.05 percent, nearly double the official number. The study also found that China’s Gini coefficient, which measures income inequality, is 0.61. This is far higher than the level at which most experts say there is risk of social unrest, a fact that is not likely lost on the current leadership. The nature of the new government’s proposed reforms makes it clear that they too recognize the need for economic rebalancing.
What we expect to see during the coming administration are specific policies that spur urbanization, free up the financial system to provide greater financing options for small and medium enterprises, and directly promote household income growth.
We believe our focus on Chinese mid-market consumer businesses positions us well to benefit from these reforms. Increased urbanization and domestic demand, greater financing options for small and medium sized enterprises, and better allocation of capital should lead to broader investment and exit opportunities.