Preview
Consumption is widely viewed as the next driving force of economic growth in China following the slowdown from a credit-fueled investment-led growth model. Geopolitical tensions resulting in increased protectionism and the diversification of supply chains away from China limits the likelihood of a return to the prior growth model.
Creating the right environment for a structural increase in consumption is not a straightforward task for policymakers. This is especially the case in China, where in comparison to its global peers, the population has grown accustomed to spending less and saving more.
Reasons for the high level of household savings and cautious consumer behavior include:
- Inadequate social safety nets, including pensions, health and education
- Weak consumer confidence
- Negative wealth effect
- Job insecurity
Structural issues in the economy including high inequality and an aging population further complicate the situation. Taken together, these factors have hampered consumption in China.
Policymakers had been undertaking gradual measures to tackle the economic slowdown, however they had been reluctant to implement a large scale “irrigation” style stimulus. There are signs this may be changing. In recent months, policymakers intensified efforts to address weaknesses in the economy and boost consumer confidence.
We believe that the government needs to undertake comprehensive fiscal and social reforms to sustainably boost long-term consumption, including:
- Enhancing social welfare programs
- Improving healthcare and education systems
- Increasing job security
- Hukou reform
By addressing these fundamental issues, there is the potential for a sustained improvement in consumer confidence, which is essential for a structural increase in consumption and in turn economic growth.
To conclude, we focus on three sectors and companies that we believe are well positioned to leverage future consumption trends in China.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.