A tale of a Chinese city in the 2000s

I first visited the ancient Chinese classical gardens in the little town of Suzhou in 2002. It was a two-hour, standing-room-only slog by commuter train from Shanghai. When I arrived, the only people wandering among the pavilions were fellow international tourists – locals were too busy working for such frivolity.

I returned recently, some 22 years after that first trip. It is unrecognisable. Suzhou is now a city of 7 million people – 25 minutes by bullet train from Shanghai. Admission to the town’s acclaimed museum is by app and tickets are sold to a growing army of Chinese tourists, normally by mid-morning.

Everyone knows China has changed, but I wonder how many western investors comprehend just how much and in what ways. And, if you want to invest successfully there, you need to understand this.

China has been a disappointment for investors since Covid. The lockdown was so much more severe there than in the West – its population was not cushioned by furlough payments. Economic recovery has been much slower and the Chinese stock market too easy to shun.

Trump’s tariff threat

Donald Trump’s victory in the US presidential election raises the spectre of punitive tariffs on Chinese imports into the US. He repeatedly cited a figure of 60% during the election campaign and in November warned of “an additional 10% tariff, above any additional tariffs” (sic).

Trump’s bark may yet prove worse than his bite – as it was when he imposed tariffs on China in early 2018. His nominee as treasury secretary, billionaire financier Scott Bessent, has described 60% as a “maximalist” position and said of the president-elect: “My general view is that at the end of the day he’s a free trader. It’s escalate to de-escalate.”

It’s worth pointing out that the US share of Chinese exports is down to 14.5% today¹, compared with 19% in 2017², so it’s not as dependent as it used to be.

Arguably more relevant to investors are the recent promises of Chinese government stimulus. The MSCI China index rose by about 20% between the start of September and the end of 2024³, but its shares are still cheap by many measures and could represent an opportunity.

China’s affluent middle class is set to grow by 80 million by 2030 (equivalent to nearly a quarter of the US population as a whole)⁴. And this growth will be amplified if the Chinese can be encouraged to change some of their financial habits.

One of the big reasons for China’s economic slump was the unwillingness of its people to spend. In the West, we save on average around 7% of our income. In China it’s nearer 35%⁵.

There is a reason for this. Despite being a nominally communist state, China can be ruthlessly capitalist. There is no national health service and insurance and pension industries are fledgling (though rich in potential). Families need a bigger safety net.

Changing spending habits

Remember too, that this is a country that has only recently become wealthy and has an ageing population. Muscle memory and the handed-down stories of grandparents who barely had enough to get by have a powerful impact on spending habits. Covid reinforced this.

The consequence is that whereas about two-thirds of GDP is typically derived from consumer spending globally, in China it is just over one-third⁶.

What has driven China’s economic miracle has been infrastructure spending – investment in property, modern roads and speeding trains that have drawn hundreds of millions of people from rural areas to the country’s fast-growing urban centres.

The Chinese government knows that the next phase of growth cannot come from infrastructure – it must come, at least partially, from consumption – from supporting the rise of the middle class and encouraging people to spend more. The two in tandem could be powerful drivers of growth.

Western brands no longer dominant

If the government in Beijing succeeds, the winners will not be yesterday’s winners – for a long time the western companies that jumped in to establish an early presence as the country’s economic revolution gathered steam. With more choice, consumers are becoming more discerning in their purchases, and we are seeing the rise of domestic brands that are often more adept at reading and catering to the consumer mood.

South Korea’s Samsung’s recent troubles are in part because Chinese brands such as Huawei, Vivo, OPPO and Xiaomi have virtually pushed it out of the smartphone market in China.

The country’s electric car industry, with the benefits of government subsidies, has established a similar grip on the domestic market. BYD produced 1.76 million electric vehicles in 2024⁷, close to Tesla’s 1.79 million⁸ — but it also built another 2.49 million hybrids. In four years, China has overtaken the US, South Korea, Japan and Germany to become the world’s leading car exporter.

Chinese manufacturers on track to become well-known names over here – beyond BYD – include Dongfeng, SAIC (owner of the MG brand), Nio and Xpeng. It is a similar story in fashion and cosmetics: look out for Icicle and Proya.

Where is the next growth area in China?

For me, the bigger question investors should ask is not whether the Chinese will spend again, but how. As Beijing continues to take steps to address the fallout from the real estate implosion – which has undoubtedly played a big role in curbing consumer spending in recent years – new market opportunities are arising.

One area that has seen rapid growth since Covid is health and fitness. Running has become hugely popular. Beneficiaries include Adidas and the Chinese brand Anta. And then there is tourism – outbound travel is now back at pre-Covid levels and up 32% year on year⁹. Trip.com is already benefiting from this trend.

Historically, the safest way to play China’s growth story was to buy western companies exposed to the Chinese market. Some may say that is still the case — but concerns remain that the state will arbitrarily undermine international businesses seen to cross a line in its eyes.

Nevertheless, I believe some of the best opportunities come from spotting the domestic brands that have taken root in China and are growing strongly. Investing in China is not as simple as it was, but from this low valuation point the potential rewards are arguably greater than ever, despite Trump.