Are the worries about China’s growth rate justified? In this edition of our China on-site series, we look at the role population growth and demographics play and highlight the importance of productivity. We also focus on the electric vehicle segment, a strategic sector in the industrial upgrade theme.
Ever since China has embarked upon its journey from a largely agrarian country to a world economic leader, experts have been worried that the country’s high GDP growth could not last. Sometimes with good reason, but sometimes – in hindsight – these fears are not so justified.
For this year, we expect 6.5% GDP expansion. Growth is gradually leveling off, which is typical of an economy that is moving towards developed status, but in our view, it will remain high for quite some time. The reason is the country’s vast potential that is yet to be unlocked: a large part of the Chinese population is still living in rural areas and contributing below potential to GDP.
The Chinese government continues to invest in infrastructure to connect the rural areas with the larger cities. This is a proven method to fight poverty, as it enables people to work in the cities, where they can take on better paid jobs, allowing them to get an education themselves and to pay for their children. It sets off a positive spiral.
GDP growth has two important pillars: population growth and productivity growth. The former is not helping China, which is faced with a population that is not growing as a result of its family-planning policies. An increasing dependency rate - the rate of unproductive to productive people, is putting a strain on economic growth.
China therefore has to rely on productivity improvement, shifting labor from non-productive to productive sectors. With strategy initiatives such as industrial upgrading, this endeavor is progressing nicely. As the figure shows, new economy sectors are expanding rapidly and will be an important pillar of economic growth for years to come.
With its industrial upgrade strategy, China is upgrading its industry to become a high-quality manufacturer. It focuses on ten strategic sectors, one of which is the new-energy vehicles (EV) segment. As a result, the EV industry is full of opportunities for active investors.
As far as ‘energy-saving and new-energy vehicles’ (EVs) are concerned, the goal is for Chinese firms to take 80% of the domestic electric and plug-in hybrid vehicles market by 2025. In addition, China should have two local champions among the world’s leading new-energy vehicles by that time, and Chinese companies are to dominate in smart connected vehicle technology.
China is already the top market for electric and hybrid cars, accounting for 53% of global new-energy vehicle sales in 2017. We expect China’s EV sales volume to show a 32% Compound Annual Growth Rate (CAGR) from 2016 to 2025, and within that, the passenger EV segment to demonstrate a 38% CAGR.
An important boost is provided by the dual-credit system the government introduced last April. This scheme targets carmakers that produce more than 30,000 vehicles per year. It rewards or penalizes them with positive or negative credits based on their car models’ fuel consumption and driving range. If a carmaker does not produce any EV, for example, it will need to buy credits from an EV manufacturer to meet the government’s goal
The credit system is one of the government initiatives designed to push the development of the EV industry in China. Electric bus sales are set to show a 5% CAGR due to the government-led electrification of public buses. Commercial EVs are expected to record a 30% CAGR driven by demand from the logistics sector.
The EV industry in China has long benefited from significant government subsidies that aim to cut down on pollution. However, having learnt some valuable lessons from the heavy subsidization of the solar power industry, the government will fade out its subsidies and promote market competition. This will lead to consolidation in the battery sector and only the domestic leaders with advantages in size and technology will survive.
As many of China’s top traditional carmakers are pouring resources into EV technology, and a flurry of international auto giants have announced plans to make EVs in China, the dynamics of the market are constantly changing. As a result, it’s too early to call the winners and losers. In our Chinese Equity strategies, we hold several stocks with direct exposure to the electric vehicles theme, i.e. car manufacturers, or indirect exposure, such as battery manufacturing equipment producers.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.