China's internet market presents one of the most compelling long-term growth potentials for investors today, given the catalysts supporting the sector from both macro and fundamental perspectives, explains Dr Xiaolin Chen, head of international, KraneShares.
The recent pullback in China's internet market after a strong rally from October last year might have introduced some questions on the sustainable rally of the sector from here. While China's internet company present unprecedented growth opportunity, it also tends to have greater volatility than the broader equity market. However, We believe this industry offers one of the most compelling long-term growth potentials for investors today as we see catalysts supporting the sector from both macro and fundamental perspectives.
Policy matters in China
China is a developing country, and policy matters the most for corporations to receive financial and regulatory support. An obvious message repeatedly emphasised in the recent critical economic events is that consumption will lead to China's economic recovery post-pandemic. From the work report delivered by President Xi Jinping at the Chinese Communist Party Congress (CCPC) in October last year to the Central Economic Work
The conference in December and the recently concluded 14th National People's Congress ("Two Sessions") in March 2023 have reassured global investors that China is on track to boost its economy to deliver a 5% GDP to achieve the modernisation goal for the country.
A pro-business and pro-growth attitude is evident in appointments at NPC. As Li Qiang confirmed as the new premier, we expect clear policy-making directions to be set for the next five years and detailed monetary and fiscal policy to be placed. We are optimistic that it could be the next catalyst for boosting a rally in China's stock market and that the consumer sector will be a key beneficiary.
Fundamental support to the sector remains intact
Today, in China, approximately 870 million people live in cities, which is a 62% urbanisation rate for 1.4 billion people. Given China's national strategy to modernise its society, the country expects another 20-30% of its population to move to cities in the following decades. China's unique customer base does not exist anywhere else in the world as it has the most middle class in one country. This is the unique and unprecedented customer base of Chinese companies, particularly internet companies focusing on developing a one-stop-for-all business model.
According to PBoC, Chinese households saved $2.6 trillion of bank deposits in 20221, the biggest pool of new savings in history, which is an 80% increase from the year before. The tech companies in China offer an entire ecosystem to benefit and capitalise on consumer spending and activities. We believe these consumers are unleashing a wave of "revenge spending" fuelled by record-high household savings and favourable government policies. This creates a compelling investment opportunity for key beneficiary companies like internet companies.
Economic recovery is underway
China's reopening has progressed more swiftly than expected and has fuelled consumer confidence and sentiment. Online sales now account for nearly 30% of all retail sales in China.2 Recent data from the Chinese Lunar New Year holiday in late January signalled a quick rebound of consumer activities post-reopening. Tourism ministry data indicated a 23% rise in domestic trips during the seven days compared to last year. China's travel booking company Trip.com saw 4x booking volume growth year-over-year (YoY) and even higher booking volume than the 2019 Lunar New Year.3
At the national level, the recent release of data points post-pandemic continues to show growing evidence that the reopening is working for China. The PMI for February confirmed the economy is in an expansionary mode. Although CPI/PPI surprised on the downside, it created more room for potential monetary easing if it shall be needed. The broader economy is at the beginning of its recovery, and fiscal policy is critical to stimulate activities; the Chinese policymaker is reassuring investors with committed support at the NPC.
As China progresses to boost its domestic economy, the equity market will transit to a growth phase. We believe that the fundamentals will become the key driver for stock performance. That created another catalyst for investors to reward the strong earnings delivered by the internet company but yet reflected in its stock performance.
Data from Bloomberg as of 2/17/2023. Past performance does not guarantee future results. KWEB price used is the NYSE closing price on the last trading day of each quarter, not NAV. Revenue & Net Income for 31/Dec/2022 and beyond is as of reports for the quarter ending 9/30/2022.
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