As appears on Investment Week on 14 December 2021.
China has weathered an elevated level of regulatory changes in 2021. Although it remains unclear whether there will be further regulatory intervention we maintain our focus on highly innovative companies, leaders in their field operating in areas of structural growth.
China’s commitment to being an innovation-led economy is clear. Pair this with its demographic scale and the rapidly expanding pool of home-grown capital, all help support our belief in its long-term potential. When looking specifically at demographics, the increasing influence of over-seas educated graduates returning to China is helping create and build innovative businesses.
According to data from China-based recruiter, Zhaopin.com, the number of overseas returnees seeking jobs in China increased by about 34% in 2020. Returnees with a master’s degree or above accounted for 74% of the total number of returnees in 2020. The proportion of experienced mature returnees has continued to rise significantly since 2015.1 In addition, Chinese universities churned out 8.7m graduates in 2020 (165k graduates in 1978). Having such a mass of highly educated talent, ensures domestic research and development so desired by the communist party, the ‘heads’ and ‘hands’ to facilitate innovation at scale. Enabling China to become self-reliant, no longer at the mercy of western suppliers and government intervention.
On the ground, evidence of world-leading innovation is there for all to see; semiconductor supply chains are growing in profitability, home-grown sportswear brands are increasing market share, winning the hearts of the growing pool of sophisticated consumers, car electrification and local know-how are helping emerging NEV brands catch up, if not outpace their global peers. Global big pharma outsourcing R&D and manufacturing to Chinese companies leading to innovative drug development for the global market. Further evidence of innovation, we find Chinese companies actively collaborating with their western peers in autonomous driving, solar, mRNA technology, telematics, and artificial intelligence.
Research and development expenditure (% of GDP)
Source: UNESCO, institute for Statistics, as at September 2021
The 7th nationwide census taken in 2020 showed that the shape of the Chinese population is changing, getting wealthier and older. The birth rate has been stubbornly low at 1.4%, well below the 2.1% replacement rate, and 13.5% of the population is now above 65 years old. China will reach similar levels of ageing to that of Japan by 2050. Another important demographic statistic is that in 1950, over 90% of the global middle class resided in Europe and North America. By 2027, it is estimated that 1.2bn Chinese will fall into the middle class, one-quarter of the world’s total.2 The ongoing hukou reforms continue to support population mobility and urbanisation. Housing now accounts for 65.3% of Chinese households’ assets compared to 36% in the US.
2021 also confirmed the authority’s commitment to deepening capital market reform. Access to capital, especially for innovative companies, continues to increase. Research by Preqin showed that YTD to September 2021, venture capital investment in Chinese start-ups rose to US$84.8bn, almost equalling the US$86.1bn invested in all of 2020.
This backdrop is having profound implications across several areas of interest for us and we continue to be excited by the range of innovative companies spanning healthcare, automation, carbon neutrality, and NEV’s (new electric vehicles,) with high-quality management teams with their interests aligned to minority shareholders. ESG reporting, management transparency plus a willingness to engage with external investors continue to improve.
China has the political willpower and economic capacity to tackle the socio-economic issues it faces, including income equality, providing equal access to education and healthcare. 2021 has been an eventful year as Beijing flexes its muscles and we expect these regulatory reforms to continue. However, given time we expect these changes to lead to a more sustainable and balanced economy a positive not just for China but the global economy.
2 https://www.brookings.edu/wp-content/uploads/2020/10/FP_20201012_china_middle_class_kharas_dooley.pdf, Oct 2020