The modification to the current one-child policy, which I recently discussed in these pages, will help create an even bigger middle class in the country that will drive up the demand for goods and services. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)
The Organization for Economic Cooperation and Development (OECD) has become more bullish on China, and predicts Chinese gross domestic product (GDP) growth will rise to 8.2% in 2014, driven by a rise in domestic consumer spending. (Source: “OECD sees China growth accelerating in 2014,” China Daily, November 20, 2013.) The OECD even goes as far as to say the Chinese economy could surpass the U.S. economy to become the world’s biggest economy by 2016. While this is faster than I expect, it’s clearly not impossible, given the rise in income levels and spending.
The middle class in China will drive the economic engine of the country, unlike what we are seeing in America with the declining spending prowess of the middle class. In fact, what we are seeing in China is similar to the power of the U.S. middle class that drove the Industrial Revolution in the late 1800s and early 1900s.
If China can emulate what happened in the U.S. then, there could be some golden years ahead for the Chinese economy.
To play the expected rise in consumer spending in China, which is increasing at double-digit rates and is likely to continue at this pace, I would suggest playing related companies or exchange-traded funds (ETFs).
An interesting ETF to look at is the Global X China Consumer ETF (NYSEArca/CHIQ), which correlates with the Solactive China Consumer Index. The fund has assets of $174 million and a management expense ratio of 0.65%.
Chart courtesy of www.StockCharts.com
The Solactive China Consumer Index tracks Chinese consumer spending; therefore, it should expand as the country’s middle class grows and drives consumer spending. The sector weightings include 57.7% consumer cyclical and 33.85% consumer defensive.
The top areas of investment for the underlying index as of September 30 were food and beverages (25.8%), retail (24.0%), automobiles (17.3%), travel and leisure (13.2%), personal and household goods (11.3%), health care (6.2%), and technology (2.2%).
The top five holdings as of November 19 were Tingyi Holding Corporation (5.23%), Dongfeng Motor Group Company Limited (5.2%), Guangzhou Automobile Group Co., Ltd. (5.1%), Hengan International Group Company Limited (5.01%), and China Resources Enterprise, Ltd. (4.79%).
The Global X China Consumer ETF makes sense if you want to play the expected rise in Chinese consumer spending directly. If you feel more comfortable playing China’s rise in consumer spending via U.S. companies, consider taking a look at corporations that have an established presence in the Chinese economy, like Wal-Mart Stores, Inc. (NYSE/WMT).