Morgan Stanley: Where are the opportunities for China in the next 10 years?

China is shifting its regulatory priorities towards achieving a balance between growth, sustainability, improving social inequality, and maintaining security. This will shift the division of economic benefits more towards workers, reducing corporate profits.

We believe that this will bring long-term and far-reaching market impacts.

01 Investment Opportunities for the Next 10 Years

By 2030, China's consumption pattern will undergo significant changes. The result of this transformation is that the value created by services for GDP will exceed that of goods, that is, GDP of services>GDP of goods.

According to Morgan Stanley's forecast, by 2030, the per capita income of Chinese households will double, and purchasing power will be dominated by the age groups of 35-44 and 55 years and above (baby boomers born in the 1960s and their children).

01 China will become the world's largest consumer country

We expect the size of China's consumer market to double in the next decade, reaching $12.7 trillion, which is 30% higher than our forecast of $9.7 trillion in 2017.

This means that in the next decade, China's consumer market will maintain an annualized growth rate of 7.9%, becoming one of the countries with the fastest growth in global consumer market size.

The size of China's commodity consumer market has now surpassed the United States as the world's largest market. If service consumption is included, the current size of the US consumer market is still significantly larger than that of China. But if our prediction becomes a reality, even if service consumption is included, China will become the world's largest consumer market in ten years.

An important characteristic of the changes in China's consumer market in the next decade is that service consumption exceeds physical consumption.

We now expect the proportion of service consumption to increase from the current 45% to 52%, with an annualized growth rate of 9.2%, exceeding the growth rate of 6.7% in physical consumption during the same period.

This is different from Western countries.

In Western countries, when the average household income reaches $8000 to $10000, the increase in the proportion of service consumption basically stagnates. However, in China, we have observed a stable upward trend, mainly due to China's unique population structure.

On the other hand, the highly digitized mobile internet greatly enhances the convenience and speed of accessing services.

Which tracks are worth investing in?

The investment framework we use:

As the growth of China's consumer market shifts from physical driven to service driven, and the focus shifts from young people's consumption to household demand and retirement plans, we expect corresponding changes in various industries.

In order to better analyze these changes, we categorize many industries into four major categories based on their product lines and the driving forces of industry changes:

01 Expansion (Service related industries mainly fall into this category)

In the coming years, we will face structured growth, such as property management, medical services, elderly care services, medical insurance, education, domestic and inbound tourism, tourism shopping, especially duty-free shops, home convenience services, and local living services.

02 Evolution (mainly driven by new business models)

In the coming years, we will face structural changes. It can be further divided into two categories. One is the evolution of business models, such as integrated platforms, supply chain management and sales channel management services, the implementation of the C2M (Consumer2Manufacter, also known as mass customization services) business model, and a wider range of AI, AR, and VR applications.

03 Emerging industries driven by a combination of technology and services

Industries that are currently limited in scale but will have significant commercial impact before 2030. For example, emotional partners, rehabilitation medical services, service robots (commercial and consumer), dating services, and consumers who place greater emphasis on the company's social responsibility (ESG, Environmental, Social, and Corporate Governance).

Growth before 2004 (mature industries that have been disrupted by demographic changes and technology)

For example: low-end alcoholic beverages, basic necessities, traditional cars, traditional household appliances.

The above classification of various industries based on the outlook for the next decade has laid the foundation for our top-down stock selection methodology.

03 Conclusion

We expect stable and rapid growth in institutionalized services (education, integrated platforms, healthcare, elderly care services, medical insurance, supply chain management), smart living (digital property management, smart homes, and electric vehicles), and life experience enhancement services/products (emotional partners, such as pets, toys, rehabilitation medical services, service robots, and social platforms).

However, offline platforms such as traditional cars and appliances will face the fate of being overturned. We also anticipate that some industries currently experiencing rapid growth will face a slowdown in growth, such as mid to low-end alcoholic beverages, basic necessities, and traditional household products.

02 Five driving factors and risk points

Five driving factors for the growth of China's consumer market size and model evolution in the next decade:

01 Revenue

The process of becoming a high-income country is often accompanied by stable growth in service consumption

According to our calculations, by 2030, the per capita disposable income will reach $12000. From international experience, when the per capita disposable income reaches 8000-10000 US dollars, the share of service consumption will steadily increase. In the next decade, the average compound annual growth rate of service consumption in China is expected to reach 9.2%, exceeding 6.7% of commodity consumption.

Before the comprehensive opening of the second child policy, China's family planning policy led to an aging population, increasing the burden of care for the elderly population. Now, this phenomenon is likely to translate into more demand for service consumption.

02 Population characteristics

The most important generational transition occurs within 2-3 years

According to our research, by 2030, the two age groups with the most concentrated population distribution are 35 to 44 years old and 55 years old and above.

From the perspective of income level, these two age groups will also happen to be the two age groups with the highest disposable income. From the perspective of consumer behavior, the main consumption expenditure of the 35 to 44 year old population is concentrated on household needs, while those over 55 years old are mainly the aging and retired population.

Based on this analysis, we conclude that the Chinese consumer market will transition from being dominated by young people in 2020 to being dominated by household demand and retirement plans in 2030.

03 Technology

China's unique consumption growth path

Specifically, we see two different trends in promoting consumption:

Digitalization of traditional economy: This will overall improve operational efficiency and enhance household consumption capacity.

A new way of life in super smart cities: the widespread application of next-generation technology can support consumption anytime, anywhere. These technologies include: super apps, smart homes based on the Internet of Things, artificial intelligence, and big data analysis.

04 Policy

Government support to unleash consumption potential

The current urbanization rate in China is only 61%, and the household savings rate is at a relatively high level of 35%. It seems that there is still a huge potential for consumption that can be explored.

So we expect to see various measures on both the supply and demand sides in the coming years to eliminate consumption bottlenecks.

The measures taken by the supply side include upgrading new infrastructure and upgrading the high-speed rail network. The measures on the demand side include increasing the coverage of social welfare, reducing income inequality, and promoting vocational training.

05 Culture

Influenced by consumer values

The cultural differences between different countries may be an important reason for different consumer behaviors. Consumers in China, Western countries, and even other Asian countries may not understand what to buy, where to buy, and even how to buy.

Although globalization has brought many Western elements to contemporary Chinese lifestyles, we can still see that Chinese consumers are rooted in China's unique local culture.

I highly value family bonds and am willing to provide significant financial support to family members.

When consuming, one often has long-term goals.

There are significant differences in lifestyle among different age groups (such as the use of online platforms and travel needs)

Possible risk points:

01 Anti monopoly measures for integrated technology platforms

The rapid penetration and growth of service related consumption heavily rely on integrated internet technology platforms.

The anti-monopoly policy issued by the government aims to prevent large technology companies from monopolizing the market and promote healthy market competition, but overly aggressive policies may also delay the growth of service related consumption.

02 Tightening of consumer credit

Policy makers have recently upgraded their supervision of internet small loans and consumer credit platforms, but we believe that the impact on consumption should not be significant, as the overall balance sheet of Chinese households still looks healthy.

But if the policy further tightens consumer credit and even affects bank channels, it may have a negative impact on the growth of consumption.

03 Relatively slow progress in social security reform

We believe that more universal and uniform social security coverage, especially in key urban areas, will effectively reduce the money people save to cope with future uncertainty, thereby promoting consumption.

Therefore, if the progress of reforms in these areas is slower than expected, it will affect the release of consumption potential.

04 Privacy concerns regarding big data

One of China's major advantages is facing lower resistance in consumer data collection during the construction of smart cities.

If the public pays more attention to data privacy, or if international data regulatory coordination mechanisms are facing upgrades, it will lead to restrictions on the application of many new technologies based on big data analysis in the consumer field.

However, the wide application of personal location technology and health code during the COVID-19 epidemic has improved the public's acceptance of big data applications to a certain extent, thus reducing the risks in this regard.

05 Accidental social problems caused by accident

The widespread application of automation and artificial intelligence may lead to more severe unemployment problems than expected, especially in the fields of construction and low value-added manufacturing. Of course, we believe that vocational training and rapidly growing services can solve some of the problems, but if high technology is applied too quickly, there is still a risk of social friction caused by unemployment inhibiting consumption growth。

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