China’s Growth Rebalancing Provides Opportunities for Bond Investors

China’s Growth Rebalancing Provides Opportunities for Bond Investors
author-image
Author:
PUBLISHED:
TAGS: ,

China’s Growth Rebalancing Provides Opportunities for Bond Investors

After a decade of relying on investment and exports for growth, China’s effort to rebalance its economy toward consumer-led growth is well underway and should continue to build steam in 2018.

We see attractive investment opportunities in Chinese companies that should benefit from this rebalancing act. Technology-led consumption, along with the growing middle class and generally healthy household balance sheets, is supporting growth in the service sector, in particular.

Consumer-oriented digital technologies reshape China’s service sector

China is the world’s largest e-commerce market and accounts for more than 40% of e-commerce transactions, up from less than 1% a decade ago, according to McKinsey and Company. In 2016, the country's digital economy – the activity that results from online connections and transactions – grew almost 20% over the year to 22.58 trillion yuan (about US$3.43 trillion), ranking second only to the U.S. and accounting for around 30% of national GDP. The growth in e-commerce substantially outpaced the 6.7% overall growth in China’s economy that year.

The proliferation of smartphones is fueling much of the growth in online transactions: The total value of mobile phone transactions in China is 11 times higher than in the U.S., according to Verto Analytics. Chinese people also spend an average of 49 hours per month on smartphones compared with 45 hours for U.S. users, and 19% of the total Chinese online user base is mobile-only, compared with just 5% in the U.S. In general, Chinese consumers are much more willing to adopt new technology than their peers in the rest of Asia-Pacific, the Consumer Technology Association reports.

China’s changing business landscape

Technologies such as artificial intelligence and big data have the potential to redefine a range of sectors in China, including finance, medical care, manufacturing, logistics and transportation, and to prompt the formation of new business models in areas such as education and tourism. As China’s policymakers aim to create stable and high quality growth, digital technology is also playing a key role in revitalizing traditional sectors and creating new growth opportunities.

One interesting example of the changing business landscape in China is the online food delivery unit of Meituan Dianping, China's largest group-deals site. Its growth has led to the hiring of around 500,000 couriers, 31% of whom come from declining traditional industries and 10% from poor areas.

In 2018, we expect China’s retail sales to continue to grow at a higher rate than the overall economy thanks to technology-enabled consumption. New business models are likely to emerge as internet leaders look to monetize their mobile payment and “new retail” business on a larger scale.

Chinese tech and consumer credit can offer value

Most of the existing Chinese U.S. dollar bond issuers in the technology and consumer sectors are market leaders in their fields, with early-mover advantages. We expect more bond offerings from new issuers in these sectors in 2018 as the investor base deepens for Chinese credit.

The U.S. government’s recently announced Section 301 tariffs , if imposed, would have limited impact on the debt of China’s technology companies in the near term since the majority of U.S. dollar bond issuers in the sector have very limited U.S.-based revenues. A longer-term impact, however, could come from restrictions on acquisitions/partnerships by Chinese companies in the U.S.

We see value particularly in shorter-dated bonds, and prefer companies with scalable business models, strong corporate governance and high barriers to entry. However, while a company might look attractive at first glance given its growth profile and the potential of the sector as a whole, detailed bottom-up research is still crucial to pick the winners.

Read our latest Cyclical Outlook, “The Beginning of the End?” for further insights into the near-term outlook for China and the global economy.

READ NOW

Yishan Cao is a credit research analyst in PIMCO’s Hong Kong office.

SHARE THIS

PIMCO’s industry-renowned experts analyze the world’s risks and opportunities, from global economic trends to individual securities.

RECENT POSTS

By Month

Categories

Disclosures

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.