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China's post-pandemic 'new normal': investment trends in 2022 and beyond

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While the rest of the world's economies enter different stages of recovery from the pandemic, China has already taken the lead and entered a post-pandemic 'new normal'. Where are the opportunity sets in this new era? Experts at SuperReturn China 2021 highlighted the biggest trends that are shaping their investment strategies for 2022 and beyond.

Growth in China

1. Digitalisation and adaptation of online services

While China’s internet and smartphone penetration was already high pre-pandemic, COVID-19 has accelerated digitalisation in various sectors. Investors have seen tremendous growth in user adoption throughout 2020, from watching TV shows to online shopping and ordering fresh food. Online education has also increased in popularity, especially since the onset of the pandemic that drove the demand for virtual lessons.

On the other hand, traditional businesses are innovating and transforming their business models to open doors to markets that they were unable to reach in the past. These new models will continue to develop, and we will see more unicorns emerging from China which will be driving the overall size of the Asia markets.

2. Increase in disposable income and consumption

As the consumers get more disposable income, how and where they spend their money becomes much more complex. There is a general upward trend in the quantity consumed as well as the quality of products consumed.

For example, the younger generations in China have now got greater spending power and a wider array of products and businesses to choose from than previous generations. These new generation of consumers are not only looking for more luxury products, but also better education, healthcare and entertainment.

This brought great growth opportunities for businesses and new business models have surfaced to meet the rising demands from the consumers.

3. Consolidation opportunities

China, the biggest manufacturing country in the world, has seen numerous industrial consolidation opportunities. The trade wars have pushed China to become more self-sufficient as a country since it could no longer rely on the import of technology – and that accelerated the opportunity set within China for businesses. It has certainly played a very important part in China’s continuous growth and helped maintain its status as the ‘growth engine of the world’.

While China was largely focused on growth investing around 15 years ago, in recent years its economy has matured significantly and GPs can see opportunities for western style buyouts and cooperate carve outs. More consolidation and corporate carve out opportunities are expected to surface in emerging markets like China, not just in developed markets such as South Korea and Japan.

4. Hottest sectors

We have seen numerous new generation healthcare entrepreneur emerging in the past few years, even before COVID-19. With the growing demand facilitated by the aging population in China, we expect to see healthcare investments remain at the peak of the valuation.

Technology across all industries is booming, which is echoed by the digitalisation and the self-supply themes. For example:

  • Traditional offline retailers are going online;
  • Ecommerce is driving the growth of logistics and warehouses within the real estate sectors, which makes China less reliant on other areas of real estates compared to before;
  • Industrial based technology upgrade is happening due to reduced import, creating opportunities for investments;
  • Financial services such as banks are using technologies to enhance their offerings.

There are always risks

Regulatory changes is one of the top concerns for GPs investing in China. The Chinese government has introduced new policies in the capital market and some of the fast-growing sectors like ecommerce and online education. While regulations are meant to protect investments, the policy formation process is a lot less transparent in China. It makes it hard to predict where things are going.

To reduce the risks and minimise the impact on investments, investors have to be local and close to the source of information. Keeping yourself updated on how the policies are changing and the direction they are heading is important. Investors also need to be mindful of businesses that have direct government intervention, especially when the government is responsible for the pricing and the revenue.

Inflation risk should also be watched carefully. Although it might not affect consumers directly, it will have an impact on the capital flow and be the key driving factor for valuation.

Valuation is another concern. Valuations are currently at a record high, and with a lot of liquidity in the market and abundant capital raising activities, we can expect to see mean reversion in China. Therefore, investors should be more selective about their investments.

Lastly, while China’s economy has shown strong recovery, investors should pay attention to the fluctuating geopolitical tensions between China-US, as well as China-EU.

SuperReturn China will return to Beijing in 2022, 17-19 May, at the Four Seasons Hotel. Want to find out more about the latest developments in the wider Asian market? Take a look at what we have to offer at SuperReturn Asia 2021 and SuperReturn Japan 2021.

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