Chinese Middle Class

Pfäffikon SZ, Switzerland – It will not have escaped your attention that over the last several months the newspapers have been filled with the headwind experienced by China. It is probably not a coincidence that the Fed recently refused to raise interest rates when we take into account the mountain of debt accrued by Chinese businesses. The US is not at all benefited with a flailing Chinese economy. The key question is whether or not the average Chinese will suffer from all the – Western media proclaimed – misery.

Depressed
Mr. Market behaved in the manner in which we truly know him: Under the influence of alcohol and severely depressed. A laundry list of outstanding businesses were cast aside because the second largest economy of the world would supposedly be at the brink of collapse. Yours truly doesn’t invest in China directly but that’s not to say we don’t have exposure there. Our strategy is one where we happily allow our investments to solve the tricky problems for us, after all they’re much better suited for that task.

Barometer
The automobile industry is a decent barometer of how the economy is truly performing in China. It’s remarkable to see that both Daimler Benz and BMW have sold more cars in September than a year ago. BMW sold 2% more automobiles in China and in Asia sales overall increased by 4.3%, according to the press release. If we look at Apple’s or Nike’s figures we see the same picture – a picture where the Chinese consumer continues to spend more. How is it then that so many investors have written off China?

Consumer Behavior
It’s interesting to analyse the conditions under which the Chinese consumer is able to obtain credit. You may not believe it but credit supply to Chinese consumers increased by 13% in August compared to last year. The data on September even show a 50% increase. Even though foreign investors are withdrawing, various data point to the average Chinese spending more and more. This is an important observation which lends support to the case of a stabilising Chinese economy.

Years ago the Swiss thought it would be a good idea to try and excite Chinese tourists for the small mountain state – they were right on the ball. Walking through Luzern one knows enough, but the prospects are even more striking. The promotion of the Rigi Bahnen AG has created a stream of Chinese which can now no longer be stopped. The small villages around the Rigi are seriously counting on a doubling of the amount of Chinese visitors in 2020. When you want to visit the Jungfraujoch you are nearly pushed off the little train by the Chinese tour guide. All I am trying to say is that things are looking good for the average Chinese and there’s no end to this in sight.

Middle Class
The middle class in China is becoming the driving force behind a totally novelly driven economy. This is a process which will continue in fits and starts but is slowly starting to take shape. It will take many more years for this phenomenon to come to complete fruition. It is for this reason that it is completely logical for many Western businesses to position themselves for what’s coming. The Swiss in any case are not writing off China and nor is yours truly.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has position in BMW and no position in the other mentioned shares and has no intention of doing so in the next 72 hours.