Income growth and increased internet access in China are helping consumers buy more products and making for “a very strong consumption outlook,” says Nicholas McConway, senior portfolio manager on the Asian equity team at Amundi Asset Management in London, England.
The growth in income and personal credit in the Greater China universe (that includes China, Hong Kong, Taiwan and Macau) is worth watching, says McConway, whose firm manages the Renaissance China Plus Fund.
Consumption is, in part, being driven by increased internet access, giving people more information on products, he said during a late June interview. Within Greater China, McConway expects consumers to upgrade from “basic products to more premium products.”
“We can observe this in the auto sector, from more local brands to international high-end brands,” he said, as well as in appliances, restaurants and home delivery. International travel has also expanded “very rapidly.”
Staples companies have been more innovative, too, McConway said, leading Chinese consumers to spend more in that space.
Higher spending can even be seen in the education space, where privatization has led to better-quality and more expensive options for students, and in the gaming industry in Macau, where “gross gaming revenue trends have recovered,” said McConway.
An expanding service sector has created demand for labour, he said. As consumers buy more products, companies can invest more and hire to keep up the pace.
But the demand for labour isn’t coming primarily from the traditional, more affluent coastal areas of Shanghai, Beijing, Shenzhen and Chongqing, as it has historically, he said.
Instead, it’s coming from “the point of consumption in tier three and four cities,” he said. Those cities, “of which there are many,” tend to be in western or inland China, and they “have far more potential for growth in income and consumption,” said McConway.
This matters, he said, because the purchasing power of consumers in the latter group is growing faster, leading to higher consumption as the focus shifts to these areas.
Another factor that’s driving income and wage growth, and increased spending, is there’s now more demand for labour than there is supply, which is “enforcing this strong nominal wage growth that we’re observing—and that we’ve observed over a number of years,” McConway said.
Combined with a very low level of personal credit (both short-term and long-term), this is leading to “a rapid increase in people’s consumption patterns,” he said.
China’s consumer price inflation rose to a three-month high in June 2018, at 1.9% year over year and compared to 1.8% in May. However, annual core inflation was still lower than the country’s consumer inflation target of 3%.
Outlook for Hong Kong
Amid the global normalization of interest rates, Hong Kong’s rising interest rates are concerning because it’s “had very low rates for a very long time, and asset prices (e.g., of real estate) are really quite expensive,” McConway said.
“We’ve been quite cautious on this normalization cycle, and have been underweight real estate within [the Hong Kong] universe. We’ve also had zero exposure to the utilities space,” which tends to be sensitive to rate changes.
Also, as interest rates and the Hong Kong Interbank Offered Rate (HIBOR) rise, mortgage rates will likely also increase, McConway said, further impacting the affordability of real estate.
The HIBOR, which is the benchmark interest rate for inter-bank lending in Hong Kong dollars, has risen throughout 2018 after being “very suppressed and low” historically, McConway said. As of July 23, it was 2.07%, compared to an average of 1.86% between 1982 and 2018.
As the U.S. Federal Reserve “has been normalizing their feds fund rate, [that’s] been putting pressure on LIBOR [the London Interbank Offered Rate], which has ultimately been putting pressure on outflows from Hong Kong dollars,” he said.
This has pushed “the HKMA [the Hong Kong Monetary Authority] to purchase Hong Kong dollars to keep the currency within the agreed-upon band, taking liquidity out of the interbank system and causing an increase in HIBOR.”
McConway said he doesn’t expect “a drastic downward movement” in asset prices. “The Hong Kong economy is very strong at the moment: last year, it grew at close to 4% and this year’s fiscal initiatives should ensure that it continues to grow, maybe at an even higher rate than last year.”
Plus, China’s strong economy overall is providing a liquidity boost. “We don’t expect any very negative outcomes for the economy.”
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