The Biggest Risk in Global Economy (part 2)

There have been to great stories in the market about what China stocks to buy, and I find both stories very unconvincing. First, the consumer story: as China has to be less reliant on export and fixed-asset investment to drive their economy, they have to sooner or later become more reliant on consumption spending. And Chinese government is committed to encourage consumer spending by introducing some subsidies, so investors should buy consumer stocks.

The flaws of this story are: would people really spend when subsidies are used or taken away? Especially in rural areas, average household income is still very low. Second, one has to recognise that for more consumer sector companies, e.g. retailing, apparel, shoes, food &beverage, etc, the competitive landscape is not favourable because the entry-barrier for these industries are generally not very high. Top listed company with low-single-digit market share is not uncommon, and listed companies have to compete not only with other listed companies, but also some very small companies. Consumer sector as a whole may be good, but picking a few stocks within? Well, I wish you good luck.

The second story is about urbanisation. Commentators suggest that going forward, there will be huge migration into cities from rural areas. That will create demand for housing, so it is good for real estate.

Construction sites and construction sites

True, urbanisation will be an un-stoppable trend. But again, apartments in cities are not that affordable for many lower-income families. And China is a large country, and Chinese cities are really big cities, and they can be expanded to the peripheral area if they like. Demand might be strong, but supply can match the increase, I believe.

Indeed, anecdotal evidence suggests that vacancies in big cities can be of mid-double-digit percentage point. As we all know that official figures from China can’t be trusted, all these numbers on vacancies are anecdotal and probably based on smaller sample size than they should. But the message is clear to me: vacancies are high, and officials in China are not quite ready to face this situation, thus they never really attempt to get these numbers

Potential over-supply does not only happen in residential space. Look at this compilation of what the Chinese are building and/or planning to build, and that is an extremely worrying sign. I can understand why Beijing or Shanghai might need 2 or 3 super tall buildings. But when every city is trying to build 2 or 3 of such things, with some overly extravagant design (although I can’t be certain if that’s really going to be built at this moment), can I not be worried?

You must be asking: that’s what I say? Do I really have the hard numbers? In the next part, I will try my best to gather more industry data for you. Stay in tune, and subscribe my blog to avoid missing out important parts!

READ OTHER PARTS:
PART 1
PART 3

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.