The digital transformation of the Chinese economy is not only about Alibaba; rather, it is more about the other new companies following the lead. Sure, Alibaba was probably the “Open sesame” to China’s digital revolution, but it has also paved the way for thousands of other companies to innovate, clearly changing the nature of growth in China.
China’s digital treasure
The digital economy is a broader concept than e-commerce – it is the economy based on digital computing technologies. As a result it crosses multiple industries and thus has an impact extending far beyond the basic consumer industries. Today, the digital economy is shifting its role from supporting existing offline industries to moving new industries directly to online services and e-commerce. This implies the development of multiple new industries. While today 40% of e-commerce shoppers are focused on casual wear, shoes, handbags, snacks and smartphones, by 2020 there should be more than 15 categories represented including home appliances, financial services, cosmetics, etc.
China’s digital economy is growing at one of the fastest paces in the world. In 2010, China’s digital economy stood at 3.3% of its GDP, lagging behind most advanced economies. However in 2013, this figure reached 4.4% – higher than both the US and France which stood at 4.3% or 4.2%, respectively. The digital economy and digital transformation of offline companies is expected to contribute 20% per annum until 2020 and creating an industry worth RMB 14 trillion (USD 2 trillion) a year by 2025. To put this in perspective, that is approximately as much as the total GDP of France.
Exhibit 1: Growth of Chinese e-commerce
Consumption CAGR* 2015-2020 (%)
Source: BCG, AliResearch, The New China Playbook, Dec 2015. *CAGR: Compound Annual Growth Rate
The size of the country’s population is what makes China’s digital story even more interesting since companies can quickly achieve scalability. More interestingly, the number of internet users in China stands at “only” 483 million (as of end of May 2015), meaning a penetration of 35.22%, which is much lower than in the US or UK. The impending increase in penetration should provide scope for further growth of the digital economy.
Exhibit 2: In absolute terms, China has the most internet users but because of the size of China’s population, the penetration rate remains relatively low compared to developed countries
Source: ITU, comScore, Goldman Sachs, May 2015
“Open sesame”… but from my mobile
Mobile platforms have the highest potential for further growth, representing 51% of all online sales in China, compared to the global average of 35%. For Taobao – the marketplace founded by Alibaba – the share of gross merchandise volume (the equivalent of sales in the digital retail world) from mobiles rose from 7.3% to 40.68% in the fiscal year 2015. It reached 68% during the marketing campaign ‘Singles days’ in November 2015. By 2020, the Boston Consulting group expects mobile e-commerce to reach 74% of online sales.
Changing the nature of Chinese growth
The digital transformation of the Chinese economy is expected to create entirely new markets and increase productivity right along the value chain. It should create solid grounds for efficiencies and even opportunities to better allocate capital. For example, at the beginning of 2015, Alibaba launched a credit scoring system that draws on the e-commerce platform’s data. The scoring system is used for consumers and small businesses, with a particular focus on those with little credit history and which may never even have applied for a bank loan or a credit card. The company has been offering loan services since June 2015. As Chinese banks gain greater access to data analytics and tools, they will be able to allocate financing more effectively to the most efficient companies.
Under-represented in Chinese indices
Being a leader in technology is part of the so-called “Chinese Dream”, the long-term vision of the Chinese economy and society. Yet digital companies are under-represented in the Chinese equity indices. Information technology represents only 7.5% of the CSI 300 Index as of April 2016. But this is changing as digital names grow and gain easier access to capital markets. In November 2015, MSCI included Alibaba and Baidu in the MSCI China Index with the inclusion of the Chinese ADRs ** increasing the percentage of IT stocks in the index from 14% to more than 23%.
One thousand and one digital opportunities: getting familiar with the names
In conclusion, we strongly believe that the Chinese digital economy will contribute greatly to Chinese consumption and GDP growth in the coming years. As China enters slowly but surely into global portfolios, we believe investors should become familiar with the Chinese internet names. The graphic below illustrates how the Chinese equivalents of Amazon, eBay and Uber stack up next to their US counterparts. We think it holds considerable promise for China’s consumer population.
Exhibit 3: Mapping of US “equivalent” of Chinese companies
Source: Goldman Sachs, company annual reports, BNPP IP 2016. ** American depositary receipts
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, portfolio transaction, liquidation and custody services for funds invested in emerging markets may carry greater risk.