In another post, I explained why the China A-Share market structure and characteristics present unique opportunities for active managers. Here, I’d like to go into detail about how those opportunities are being driven by the well-documented growth in China’s middle class combined with its innovation boom.

The Ongoing Chinese Consumption Story

China now has the largest middle-class population in the world, with 109 million adults (versus 92 million for the United States and 62 million for Japan). And it’s growing.

In 2010, roughly 8% of Chinese households were classified as upper middle class or affluent—a number that is forecast to grow to 57% by 2020. That is a compound annual growth rate of more than 20%, as the chart below illustrates.

China’s Innovation Boom

China is commonly characterized as a smokestack economy, addicted to debt, infrastructure investment, cheap manual labor, low-value exports, and polluting industries.

But this is inaccurate, in our view. An ongoing innovation boom is quickly transitioning “Made in China” to “Invented in China.”

In regard to some of the most innovative technologies and growth industries—financial technology, virtual reality, artificial intelligence, robotics—China is comparable to the United States today in terms of venture capital investment.

An ongoing innovation boom is quickly transitioning “Made in China” to “Invented in China.”

Another example is China’s e-commerce market, which is now twice as large as that of the United States. China’s two leading mobile payment apps now process $10 trillion in online payments annually, more than Visa and MasterCard combined. China is also the world’s largest market for electric vehicles, solar power, and wind turbines.

The level of innovation has clearly accelerated from five years ago, and has done so far quicker than most envisioned.

Why Is an Active Approach Necessary?

We believe an active approach is a necessity when accessing the China A-share market because benchmark indices do not provide a fair representation of real growth opportunities in “new China.”

First, state-owned enterprises (SOEs), which tend to be less efficient and less profitable than their private-sector peers, make up a vast majority of the market: 63% of the MSCI China Index and 74% of the CSI 300 Index. This is particularly notable given that SOEs account for less than

10% of Chinese GDP and 5% of Chinese employment. Clearly, SOEs are overrepresented in these equity indices.

Second, the “old China” sectors—the financial, real estate, commodity, heavy industry—dominate Chinese equity indices, accounting for 82% of the CSI 300 Index. The “new China” sectors—healthcare, IT, media, and renewables—account for just 18% of the CSI 300 Index.

New China has delivered almost double the revenue growth of old China, with lower leverage and higher market returns.

This is significant, because old China tends to have lower growth, lower return, and more debt, as the chart below illustrates. New China, meanwhile, has delivered almost double the revenue growth of old China, with lower leverage and higher market returns. We expect these trends to continue as new China continues to deliver stronger fundamentals.

China A-Shares for Broad Exposure

China A-Shares offer the broadest exposure to the Chinese consumption and innovation stories. Chinese companies in the home furnishings, white goods, advertising, and media sectors, for example, are mainly listed on the Shanghai and Shenzhen stock exchanges, which have been historically difficult for foreign investors to access.

And, as one of my colleagues will explain in another post, enhancements made to safeguard China A-Share investors’ interests have made the China A-Share market much more appealing.

 

Disclosure

Past performance does not guarantee future results. Any investment or strategy mentioned herein may not be suitable for every investor. Investing involves risks, including the possible loss or principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The securities of Chinese companies may be subject to greater volatility and less liquidity than companies in more developed markets.

Casey Preyss, CFA, partner, is a portfolio manager on William Blair’s Global Equity team.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

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Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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