The Chinese consumer sector has had a tough year. Strict lockdowns as a result of zero-COVID policies have repressed spending on a variety of goods and services. Troubles in the country's huge property sector and a weak economic outlook have further weighed on sentiment. Discretionary spending was down 3.1% in 2022.1
However, China's sudden (and surprising) removal of severe COVID restrictions appears to release a wave of pent-up demand. And shoppers have money to spend. According to the People's Bank of China, cautious Chinese workers have saved nearly US$2.6 trillion in 2022. That's a lot, even given the population's traditionally high propensity to save. With the shackles off, many households will now be keen to open their wallets. By our estimates, spending COVID savings could boost consumption by 14%–20% this year. Businesses exposed to this outlay look set for a prosperous 2023. This should also have a positive knock-on effect for jobs and the wider economy.
By our estimates, spending COVID savings could boost consumption by 14%–20% this year.
How does this look in practice?
With the easing of COVID measures, China's skies are once again fully open – and domestic and international travel looks set to soar. One company well-placed to benefit from this increase in travel is a major Chinese air transportation hub. Across numerous airports, the air transportation hub offers everything from air-traffic control and baggage handling to commercial-driven enterprises like terminal management and advertising. One of its main drivers of growth is its duty-free operations. And, with soccer's popularity on the rise, the air transportation hub's shops should see an increase in profits.
With China's citizens again back in the office, commuting, and socializing, we also expect a renewed appetite for a range of beverages, foods, and snacks. One company in the snack camp is a leading player in the Chinese roasted seeds and nuts market, with a widely-recognized brand. The company has an established offline nationwide network, with over 1,000 distributors serving 400,000 sales terminals. It also has partnerships with hot pot, fresh fruit, and stationery shops across numerous provinces. This excellent coverage and reputable name mean sales could potentially flourish over the course of 2023.
Another firm that could benefit from China's reopening is a Chinese glass producer, specifically for automobiles and trains. Demand for autos tumbled throughout strict pandemic curbs, while supply-chain issues weighed on the whole sector. But with lockdowns easing, demand for vehicles should return and production looks set to kick into gear. With over 60% domestic market share, this Chinese glass producer is well placed to capitalize on this renewed motor enthusiasm, particularly in the fast-growing electric vehicle space. For investors, three years of underperformance means the stock is potentially trading at an attractive price relative to its prospects.
What's the long-term outlook?
We believe the rise of the Chinese consumer is a long-term story. With the goal of becoming a moderately prosperous nation by 2035, the government is increasingly launching policies to support self-sufficiency and domestic consumption. The country is investing considerably in technology and innovation, notably in green tech, telecommunications, robotics and more. Urbanization continues apace. All of these should potentially feed through to better jobs and increasing household incomes. This should further boost spending as the growing middle classes seek to improve their lifestyles. According to McKinsey, upper-middle households (those with incomes over US$22,000) will grow 70% by 2023. Companies that can tap into this demand could potentially flourish.
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