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.
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.
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.
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