China on-site: property bubbles and internet growth

China on-site: property bubbles and internet growth

01-12-2017 | Insight

In our bi-monthly publication on China we discuss a key concern and a key opportunity. In this edition, we examine whether property is in bubble territory and discuss the phenomenal growth in China’s internet industry.

  • Victoria  Mio
    CIO China, co-Head Asia Pacific Equities, Fund Manager Robeco Chinese Equities
  • Hauke Ris
    Client Portfolio Manager Asia-Pacific Equity
  • Jie Lu
    Head of Research China

Speed read

  • Is Chinese property in bubble territory?
  • The Chinese internet industry is growing explosively
  • Especially e-commerce offers opportunities for investors

Concern: property in China

Headlines about elevated house prices in the largest (tier 1 and 2) cities and oversupply in smaller (tier 3 and 4) cities are worrying some investors. The property sector is inherently diverse, though, and, in our view, not on aggregate in a bubble state.

The nationwide price-to-income ratio has declined from 10x in 2001 to 7.4x in 2016. Although this is a significant improvement, 30% of the country’s market (particularly tier 1 and 2 cities), with price-to-income ratios of more than 10x, is in a bubbly state. The remainder scores healthy on this metric. In the market as a whole, leverage has increased since 2011 and needs close monitoring, as it is still rising. For example, the Chinese are allowed to leverage the amount saved in provident funds (government-managed retirement savings schemes) as collateral, to increase their loans. When we add this leverage to the loans included in the loan to value ratio, the latter amounts to 45%, which we do not consider dangerous.

Inventories have declined since 2015. For tier 1 and 2 cities this is not good news per se, as prices have increased so much. As it is difficult to increase supply there, the primary measure for controlling house prices is to restrict home purchases. For tier 3 and 4 cities further destocking is needed to balance the market and improve profitability of developers. We believe the current trend is positive for the sector.
Stay informed on emerging markets with monthly mail updates
Stay informed on emerging markets with monthly mail updates

Demand remains strong, driven by urbanization and an important but often underrated phenomenon: the shrinking average household size. Late marriages, increased divorce rates and aging have pushed down household sizes. Together with replacement demand, this is sustaining the level of new home sales. Our analysis shows that at around 1 billion m2 per annum, floor demand will stabilize over the coming decade.

Opportunity: phenomenal growth in China’s internet industry

The Chinese internet industry is growing explosively. Internet activities account for 6.9% of China’s Gross Domestic Product (GDP), the second-largest percentage in the world after South Korea. Nascent segments such as AI, social advertising, and internet finance have been growing at 50%-100%+ over the past three years. We expect them to become mainstream and act as long-term drivers of the internet industry over the next decade.

Currently, around 52% of the Chinese population uses the internet, a percentage that may well near 100% by 2025. Growth will mainly come from rural China, where internet use is still low. This does mean that future internet use will be of lower monetary value, as rural disposable income per person is just one third of urban income. But still: the Chinese internet industry is worth RMB 390 billion, or 60 billion in US dollars, and is growing at a compounded annual growth rate (CAGR) of a whopping 30%.

A strong structural tailwind is the transition of China’s economy towards a more consumption- and service-led growth model, with consumers shifting from offline to online consumption and disposable income rising across the country. As China is still not making by far as much money as the US from the internet, a huge potential remains.

An attractive segment is e-commerce. Online shoppers are only 32% of the population and online retail is some 12% of the retail industry. Online retail sales amount to RMB 4 trillion and are growing at a CAGR of circa 22%. This is driven by robust consumption growth, which significantly outpaces overall economic growth, and an expanding user base. Opportunities are found in home appliances and food & beverage, as not many people are buying these online yet.

Online advertising has tremendous room for growth. Advertisement spending is only circa 0.4% of GDP, against 0.7%-0.9% in developed countries. As the economy is becoming more market-oriented, this is expected to grow by a CAGR of 25%.

Many Chinese internet sectors are dominated by industry leaders such as Baidu, Alibaba, and Tencent. They are expanding quickly by building whole networks of related services that make them almost indispensable in daily life. An example is Tencent’s WeChat app, which allows users to book doctor’s appointments, order groceries, pay bills and much more.

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree