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China’s Consumers Power Ahead

For the past 50 years, the Asian Development Bank has largely focused on helping the region develop a middle class — a strategy that has benefited China. The nation’s per capita GDP has soared 26-fold, from $314 in 1990 to $8,200 today, thanks to aggressive market reforms that turned the Middle Kingdom from an impoverished country into the world’s second-largest economy after the U.S., and one of the major drivers of global growth.

Last year China’s private consumption outpaced its GDP growth as the nation’s economic expansion slowed. Retail sales rose 9.6 percent in real, or inflation-­adjusted, terms, down from a 10.6 percent increase in 2015 but substantially higher than the 1.7 percent rise in the U.S.

Andy Rothman, an investment strategist at Matthews Asia, a global fund manager with $26.4 billion in assets under management, is optimistic about China’s consumer markets in 2017 despite the year-over-year decline in retail sales.

“Rebalancing will continue, and although the growth rates of retail sales and income are likely to continue their gradual deceleration, I believe China will remain the world’s best consumer story,” Rothman says. He points to a new study by global advisory firm Oxford Economics that predicts middle-­class Chinese consumers will exceed the entire U.S. population by 2026. “This is why 87 percent of the Chinese equities we hold, across all strategies, are in consumer and services sector companies,” he says.

While retail sales in the world’s most populous nation provide a boost to China’s economy, the country’s GDP has slowed from historical standards. China’s economy expanded 6.7 percent in 2016, down from an average of about 10 percent for the past 20 years.

Against this backdrop, two of Institutional Investor’s top-ranked analysts in China offer some recommendations for the consumer sector.

Chen Luo, who covers consumer discretionary equities at Beijing-based China International Capital Corp., the No. 1 China equity research house for five years running, recommends Midea Group Co., a Shenzhen-­listed air conditioner manufacturer.

“We believe Midea could enjoy steady growth, driven not only by the end of air conditioner de-­stocking but also by its industry leadership, consistent market share, comprehensive product mix, and incentivized management team,” Chen says. On March 17, Midea’s shares traded at 33.4 yuan ($4.84) a share, up almost 19 percent for the year.

Chen expects high-end discretionary consumer stocks to have stronger momentum than their lower end counterparts, partly as a result of macroeconomic tailwinds. “However, we do not rule out some slowdown, possibly in the later part of 2017, given global economic volatility and uncertainty over U.S. trade policies,” he says.

Tina Long, who covers consumer staples at Bank of America Merrill Lynch in Hong Kong, recommends Shanghai-listed Kweichow Moutai Co., which makes one of China’s leading liquors. The company’s shares traded at 378.5 yuan on March 17, up about 13 percent this year. Kweichow Moutai is in “a sweet spot to lead the recovery of the white-liquor sector that was hit heavily during China’s anticorruption campaign,” Long says, adding that “we continue to like the name in 2017.”

See related stories: Asian Development Bank: A Force of Stability; Asia's Ballooning Bond Market; and ADB Seeks Private Sector Help for Infrastructure Projects.