The key economic force remains the expansion of China's middle class, already the fastest growing in history and increasing rapidly in affluence. According to Boston Consulting Group, China's middle class and affluent populations will grow by over 80 million during 2022 to 2030, to account for 40% of the country's total. The May 2023 study also found Chinese consumers are willing to trade up across many product categories, including fresh and organic foods, healthcare, personal and home care, electronics, sports gear and beauty products.
This should support ongoing consumer spending, which is becoming an increasing share of China's economic growth. Demand for premium goods and services remains high, with growing consumer focus on domestic brands as Chinese firms become more sophisticated in technology, manufacturing and marketing. At the same time, China's aging population and rising spend on healthcare should support companies that provide drugs and medical services. And technology champions in niche markets should benefit from the trend toward localized production. Consequently, we invest heavily in high-quality Chinese companies in areas like pharmacies, home appliances, home decoration, express delivery and hotels.
Across economic and demographic segments, the influence of Chinese companies is growing. It's useful for investors to understand the runway for some Chinese companies compared with their larger global peers. For example, Nike Inc. is a leading sportswear company, and its brand is known around the world. In China, ANTA Sports Products Ltd. is a domestic leader and is gaining market share, although its revenue is a fraction (roughly 16%) of Nike's. Similarly, Jiangsu Hengrui Pharmaceuticals Co. Ltd., a leading pharmaceutical company in China, generates revenue a fraction (roughly 3%) of global leader Pfizer Inc.'s; Shenzhen Inovance Technology Co. Ltd., a leading automation company in China, is far smaller than Siemens AG; and Shenzhen Mindray Bio-Medical Electronics Co. Ltd., a leading medical equipment company in China, is currently dwarfed by Medtronic PLC.
Rather than being guided by Chinese government policies, property measures, interest rates or GDP growth, we invest in companies based on their ability to gain market share, earn higher margins, create more valuable brands and have strong management and alignment with stakeholders. Also appealing are Chinese companies with competitive advantages in the form of strong brands, strong distribution, cost leadership or simply those that provide a service or product that customers cannot live without.
As Chinese businesses and markets continue to mature, investors need to not only think about the medium-to-long term, as in three to five years, but also the longer term, like 10 years and beyond. During the last three decades, Chinese businesses and markets have evolved from being somewhat basic to much more sophisticated. Some of the earlier stocks that were listed in China's then nascent stock market included a pencil-making company, First Pencil, and a motorbike company, Jinan Motorbike, both of which have gone bankrupt. Today, China's stock market is the world's second biggest and includes technologically advanced companies like Tencent Holdings, Meituan and Shenzhen Mindray, which are arguably global leaders or on their way there.
What will the next 30 years look like for China? The mainland China A-share market, which over time has continued to open incrementally to foreign investment, now includes around 4,500 listings spanning capitalizations ranges, dwarfing the 500 listings in Hong Kong H shares and red chips. Still, foreign participation in the mainland A-share market is only around 5% and this should continue to increase as access opens more and markets mature in oversight and operating standards.
The A-share market continues to trade at a valuation premium to H-shares and ADRs, perhaps because of lower sentiment among investors outside of China and certain structural factors such as the split of retail vs. institutional investors. However, in our view the appeal of the A-share market is not due to valuations, but the market depth and range of choices. In certain industries, such as industrials, home appliances, medical equipment, technology and drug companies, investors can only access the best Chinese companies via A shares.
Though A-share markets are more broadly accessible than in the past, many domestic companies remain underfollowed globally. Moreover, many of the companies or sectors today were not around 20 or even 10 years ago. We will see more tech-savvy manufacturing like robotics and medical devices and home-grown brands in areas like sportswear and luxury products.
Many of China's domestic leaders should continue to gain share on the mainland relative to their global competitors. In time, we expect them to compete globally.
With the largest middle-class population in the world, increasingly sophisticated domestic companies and a stock market that has grown to be the world's second largest, China remains a critical market for investment. Amid the sluggish post-COVID-19 recovery, valuations have become cheaper again. We think the recent pessimism is a buying opportunity for quality Chinese companies.
Winston Ke is a portfolio manager at FSSA Investment Managers in Hong Kong and lead manager of the FSSA All China and China A-shares strategies. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.
