The Chinese consumer is being overlooked by investors

Rahul Chadha, co-chief investment officer for Hong Kong-based Mirae Asset Global Investments, has a few charts he is particularly fond of when it comes to telling a story about investing in China.

One shows income growth in China. Based on the current rate of expansion, he expects the world’s second-biggest economy will achieve high income status — defined as income of almost $12,500 per capita — in eight years.

The second shows a ratio of household debt to gross domestic product for a number of countries. For thrifty mainland China households, the ratio is 28 per cent. That compares to India at one end of the scale at 15 per cent and the UK at the other with 90 per cent.

So, based on their income and potential to borrow, the Chinese have spending power and the potential to increase it. The growing muscle of Chinese consumers is not, of course, a new investment theme when it comes to Asia.

But at a time when wage growth is muted in other large economies, such as the US and the eurozone, the situation in China is surprisingly overlooked rather than celebrated.

Disposable income per household in China rose 7.3 per cent in real terms in the first half of this year. That surpasses the 6.9 per cent pace at which the economy expanded in the period.

Moreover, the number of jobs created in urban areas came in at 8.55m in the first seven months of 2017, according to data from JPMorgan, not too far from the year-end target of 11m. In sharp contrast, India is generating roughly 1m jobs a year at a time when it needs to fashion 10 times more to absorb the youth streaming in from the countryside in search of a better living.

It’s not just the level of income that is improving in China. Its distribution is too. The government is spending more on a social safety net, and provides more by way of pensions and medicines, including medical care and education.

“In a way this is catch up,” Haibin Zhu, chief China economist at JPMorgan, says of the income growth in China. “In a way it reflects the fact that the working age population is declining. But for the past 10 years income is going up for the majority of people steadily and gradually.”

It’s an especially notable achievement given that some of the other forces at work in the Chines economy are far from helpful. The expansion of the sharing economy and ever growing role of technology across most sectors is ultimately deflationary. Automation is increasingly displacing manufacturing jobs. At the same time, sophisticated computers are now eliminating low end service jobs.

As investors survey the effects of income growth, it is the new economy, with its emphasis on services and consumption, and private companies in it, that are the beneficiaries as they cater to the appetites of a growing middle class.

Mr Chadha, for example, is a fan of companies such as Ctrip, an online travel app, healthcare, insurers such as Ping An, (rather than the state owned behemoths) and internet and ecommerce firms. Ctrip for example has 75 per cent market share in online travel.

These trends carry risks — and the biggest lies in Beijing. The government expects the rapidly growing, but still insecure, icons of the new economy to do their national service alongside state-owned enterprises.

That was evident a few weeks ago when Alibaba, Baidu and Tencent Holdings all wrote cheques to telecoms company Unicom and China Life as part of a plan to diversify the ownership of the state owned groups.

So far authorities in Beijing have been judicious in how they lean on these fast-growing, disruptive companies and, more broadly, how they leverage the private sector generally.

As household incomes continue to grow, investors must hope that Beijing’s attitude to the companies of the new economy remains relatively benign.

henny.sender@ft.com

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