With that fresh in my mind, I was not remotely surprised last week when
Bright Food, one of China's largest food groups, snapped up 60pc of Weetabix –
the Chinese appetite for Western products is far from restricted to luxury
brands.
In fact, the evidence from my spin round China with my colleague Anthony
Bolton a couple of weeks ago points to the real consumer growth story being at
the bottom end of the market. Yes, the likes of Burberry, BMW and Louis Vuitton
will do well in the newly-affluent, brand-conscious mega-cities that places such
as Shanghai have become in recent years. Indeed, a luxury car dealership I
visited projects 30pc annual growth into the future.
But I think the better opportunities will be found among companies catering
to the millions who, for the first time, are buying packaged instant noodles,
eating out in Japanese-style Ramen restaurants or upgrading to the Chinese
equivalent of a Travelodge.
I talked to the managements of companies operating in all three of these
markets and the outlook they described was very bright indeed. I heard similar
stories from a high-end cosmetics chain and an upscale department store but the
evidence of my own eyes made me more excited by the mass market opportunity.
I'd no sooner got back to London than Goldman Sachs sent me a research note
describing exactly what I'd seen for myself.
Splitting China's 600m strong urban population into income bands, its
conclusion is that the mass market (with earnings of between £150 and £400 a
month) provides the best long-term growth prospects and more reliable,
structural rather than cyclical, growth too.
As the mass market accounts for around three quarters of city-dwellers,
boosted by millions of migrant workers in recent years, the growth potential for
products such as a humble British breakfast cereal is immense.
As the information overload of a week in China settles, one of my main
conclusions is that sometimes we over-complicate investment. Having visited
around 20 companies and spoken to many other experts on the Chinese economy, I
understand the concerns about China – inflation, bad debts, over-investment –
but the sheer scale of the transformation of a country of 1.3bn people from an
export and investment-led economy to a domestic consumption-driven one trumps
these.
As one of many articulate and impressive business leaders I had the
opportunity to talk with put it, "everyone says China is difficult to read, but
it's actually the simplest country in the world to understand. You just have to
look at the Five Year plan".
The latest of these makes quite clear that the Government is guiding the
economy to a slower and more sustainable rate of growth (although at around 8pc
a year, one we'd certainly settle for), a much reduced dependence on
infrastructure investment and a massive increase in the spending power of the
ordinary worker.
The minimum wage will increase by 15pc a year for the next five years, which
will double the incomes of low-earners and bring a bowl of Weetabix within the
reach of millions.
Mass market consumption will benefit from two other factors: the ongoing
urbanization of China, which has some considerable way to go, and improvements
in the social safety net, the absence of which has been a driver of China's
extremely high savings rate. In the five years to 2010, government spending on
healthcare, for example, rose more than three-fold.
As one China strategist told me, the fact that household consumption is still
a small part of China's GDP merely reflects the 25pc annual growth in investment
over the past nine years. China "will continue to be the world's best
consumption story for everything from instant noodles to luxury cars".
This does not mean that profiting from China's rapid growth will be easy. The
one thing that is abundantly clear from a visit to China is that it is different
– different priorities, different standards of corporate governance, a wholly
different relationship between the individual and the state. That means there is
no substitute for kicking the tyres on the ground and doing plenty of due
diligence. I would be surprised if long-term outperformance did not make it
worth the effort.
Tom Stevenson is an investment director at Fidelity Worldwide Investment.
The views expressed are his own. He tweets at @tomstevenson63
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