You may have seen predictions from some big names recently regarding the continuing potential (or future lack) of Chinese growth or resources demand. Without repeating them here, I have one more prediction to add to the list – in fact it’s not a prediction, it’s a promise:
Chinese demand for tertiary services will be substantially higher in the future than it is now.
I’m talking in the order of trillions of dollars. Not just one or two, but maybe twelve, or forty, or more. With over four times the population of the USA, if China was identically developed you might see tertiary production worth as much as $60 trillion dollars. Stick with me for a brief lesson in economics and I’ll explain why this is important.
As a nation’s wealth rises from primary and secondary industry (harvesting and manufacturing), its population – working in these industries – begins to earn more than is required for mere survival. The extra is spent on improving their quality of life – on ‘tertiary products’ or ‘services’. These can include holidays, education, healthcare, accountants, lawyers and so on, or things as simple as nicer clothes and a new car.
In Australia we’re especially blessed – often we can afford these things and still have money left over to invest each month. It’s no coincidence that our tertiary production is #16 in the world, valued at $0.718 trillion USD, while our primary and secondary productions don’t even make the top 20. Other developed regions share similar traits. In the Eurozone, primary production is worth only $0.3 trillion USD. Secondary production is $4.221 trillion, while tertiary production is worth $12.146 trillion dollars. The relative proportions of each sector are similar for the US and Australia.
What investors should find interesting is that China’s secondary and tertiary outputs are almost exactly the same, at $6.605 and $6.502 trillion USD respectively.
Research shows that as these two equalise, manufacturing declines while services heads skywards. The upside in fact could be a lot higher than $1 trillion – it could be as much as $6 trillion or more; the sky is the limit in the world’s largest economy. In fact, if demand for services grew at 5% a year, growth would hit $1 trillion in just three years.
Thanks to our solid trade relationships, Australian companies are well poised to benefit from the upswing in services. Many are gun-shy however, with very few having made significant moves to gain Chinese exposure.
Aussie banks have made some headway, with Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) already part-owning several banks in the region. ANZ in particular has an aggressive Asia strategy which earns it a big tick in my books.
Those looking for a more direct foothold should consider Telstra Corporation Ltd (ASX: TLS), Treasury Wine Estates Ltd (ASX: TWE), and OrotonGroup Limited (ASX: ORL), all of whom are venturing into the Chinese and Hong Kong markets. Telstra’s Asia strategy is well underway, and has already paid big dividends with its $2.4 billion sale of Hong Kong telco CSL. Treasury faces a number of obstacles to mainstream acceptance but I think that Oroton Group’s Chinese partnership with Brooks Brothers could be very, very successful. There are even opportunities for shopping centre investors like Westfield Group (ASX: WDC) to own the malls that harbour the retailers, though of course there are high barriers to foreign land ownership in China.
The golden goose of Chinese exposure however rests in the nest of healthcare companies like Sirtex Medical Limited (ASX: SRX), ResMed Inc. (CHESS) (ASX: RMD) and EBOS Group Ltd. (ASX: EBO). The Chinese population is currently growing at 1.18 children per couple – well below replacement rate – which will see the population age disproportionately quickly. Rising income will also see greater individual expenditures on healthcare, and with any luck the Chinese will want health insurance which provides opportunities for companies like NIB Holdings Limited (ASX: NHF). Health insurance will be a further shot in the arm to Chinese healthcare demand, and companies like oxygen mask manufacturer Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) stand to benefit from China’s poor air quality.
China is still a way away from de-industrialisation and its economic landscape is comprehensively dominated by the state, which creates unique challenges for companies trying to enter the region. The changes are happening though, and Aussie companies need to jump on board or they’ll miss the boat. China is a daunting market to enter but success is far from impossible – inertia will quickly separate those who will from those who could. The opportunities I’ve listed here are just a fraction of those ultimately available – the list of potential benefactors can be expanded to include travel agents, packaging manufacturers, insurers, fund managers, investment banks, education companies and more.
It’s unfortunately too early to tell which of these companies will really hit the ball out of the park, but three I’m watching closely are Treasury Wines, Telstra and Oroton Group. Hopefully more companies will join these in the near future – $1 trillion is a lot of money, and there’s plenty to go around. Reporting periods and announcements will be key indicators of future success, so watch your pet stocks closely.