News & Insights Zhenyi Tang: A diverse range of emerging companies will continue to drive the growth of the Chinese economy
What are your great expectations for China’s entrepreneurs and their global ambitions?
ZT: Over the past two decades, entrepreneurship in China has grown at an exponential rate. It is bringing disruptive changes not only to China but increasingly also to the rest of the world. This is a key trend that we expect to continue.
China’s entrepreneurs have benefited from China’s massive population base and huge upcoming middle class. China’s consumer market is large, fast-growing, yet under-developed, providing rich soil for entrepreneurs offering business model innovation. The internet companies, largely O2O companies, were the main beneficiaries and drivers.
For example, emerging companies built by Chinese entrepreneurs have achieved unprecedented growth and scale over the past two years. Unicorns are getting younger and growing faster. Of the 99 Chinese unicorns, close to half of them achieved a USD 1 billion valuation within two years.
To date, China is the second-largest source of unicorns in the world, close on the heels of the US. Globally, there are 410 private start-ups with valuations exceeding USD 1 billion and an estimated total value of nearly USD 1,320 billion1, of which China contributes 24% of the companies and 29% of the total valuation.
In the next 10 years, we expect that China’s entrepreneurs will be more ambitious and seek to make an even more meaningful impact on the global market. In the next decade, the world will see more and more Chinese companies competing head-to-head with Silicon Valley, particularly in the “hardcore” areas. The internet industry may continue to dominate, but sectors such as artificial intelligence/big data and biotech are expected to catch up.
As China continues to accelerate the opening of its financial markets, what further opportunities will this create for investors over the next 12 months and over the next decade?
ZT: We are encouraged by the policies announced by the Chinese government to ramp up the liberalization of its financial markets, by allowing foreign capital access to more financial services such as the bond market, insurance, asset management and pension funds.
As the world’s second largest economy, China’s domestic financial market is becoming increasingly relevant to international investors. China’s journey towards integrating its capital market with the international investment community has just begun, and we believe it is an exciting time for investors to participate in the China theme as the country’s liberalization accelerates.
For example, MSCI, the world’s biggest index provider, took the initial step in 2018 to include 5% of China A-shares in its benchmark indices. The inclusion factor has subsequently increased to 20% in three stages this year, adding an estimated inflow of close to USD 50 billion of fresh foreign capital into the Chinese domestic market by November 2019. This would represent a significant boost to the ~USD 200 billion of foreign capital currently invested in the A-share market, which represents just 7% of the total A-share free-float market capitalization.
China also offers one of the largest pools of pension savings in the region. Credit Suisse estimates that China’s pension fund market will grow to assets under management of USD 13.8 trillion in institutionally managed pension, mutual and insurance funds from a base of USD 1.2 trillion in 2014, with a compound annual growth rate of 17%.
With various initiatives (such as stock connect, QFII, QDII) to attract foreign fund flows and promote onshore and offshore connectivity, the further liberalization of the China market is also likely to benefit financial institutions that are able to provide sophisticated products and comprehensive services to onshore clients, and contribute to the evolution of the Chinese wealth management industry.
In what areas do you think China can become a true global leader?
ZT: China’s entrepreneurs play a critical role in the transformational changes taking place in the country today. China has made great strides in the field of technological innovation over the past two decades and is now leading the way in the development of many cutting-edge technologies, thanks to the achievements of its entrepreneurial community.
Against the backdrop of ongoing advancements in technology and China’s vast market opportunities, a diverse range of emerging companies will continue to drive the growth of the Chinese economy – particularly in these four key areas:
1. Artificial Intelligence (AI): China is expected to become a leader in AI by 2030, driven by substantial venture capital investment, a large smartphone user base of 730 million and a robust talent pool.
2. E-commerce: With close to 800 million internet users, China is already the world’s biggest e-commerce market, and it is expected to surpass the US to become the largest retail market in the world. Home to the world’s most advanced digital payment system and AI technology, China’s entire eco-system is geared towards enabling e-commerce companies to thrive and become true global leaders.
3. The smart EV segment of the auto sector: We have identified three mega trends within the smart energy vehicle (EV) segment, notably electrification, autonomous driving and smart features. Chinese companies are well placed to capture the opportunities in each of these areas. China’s new energy vehicle industry has developed rapidly due to government policies to bolster sales and drive innovation, and it is integral to the nation’s broader plan to reduce pollution and meet soaring domestic energy demands.
4. Education: There is robust and growing demand for private education among the expanding Chinese middle-class. With Chinese parents prepared to invest heavily in education for their children, we believe there are huge opportunities for companies to offer a range of education services and develop innovative ways of delivering education online.
1Source: CB Insights, data as of 28 August, 2019.