Unveiling China's Dynamic Opportunities: Insights from My Recent Journey

I recently embarked on a month-long journey back to China, marking my return after almost two and a half years due to the disruptions caused by COVID. Rarely do I spend such long intervals away from home; in fact, during 2018-2019, my wife and I would visit at least on a quarterly basis.

This extended gap provided me with a unique perspective on China's market environment. Not only was the duration significant, but the period itself was eventful, characterized by the global impacts of COVID, the heated US-China rivalry, the emergence of generative AI, a challenging global macroeconomic landscape, and the turbulence in the crypto and web3 markets, among other factors.

With these dynamics in mind, I embarked on a trip focused on exploring how these macro and micro factors influenced the fundamentals of the Chinese economy. Throughout the month, I had the opportunity to visit five different cities: Beijing, Shanghai, Hangzhou, Changsha, and Loudi. My goal was to avoid sampling bias and gain a more representative view by visiting two Tier 1 cities, two Tier 2 cities, and one Tier 4 city.

The rise of consumerism

Consumption and consumer brands are experiencing a resurgence in China. The May 1 International Labor Day, a major travel holiday, saw a remarkable increase in the number of travelers. More than 275 million people, nearly 2% of the Chinese population, embarked on journeys during the 2023 Labor Day season, indicating a rise of almost 20% compared to the pre-COVID period in 2019. This surge was partially fueled by the pent-up demand accumulated over the three years of travel restrictions in China.

Although I didn't travel during the very peak days, I still witnessed the effects of this travel boom firsthand. The flight from Shanghai to Changsha before the holiday season and the high-speed train journey from Changsha to Beijing in the midst of the holiday season were fully occupied. The airports and train stations were bustling with travelers eager to explore. This resurgence in consumption extended beyond travel, encompassing everyday expenditures on food and beverages.

Throughout all five cities I visited, restaurants experienced high occupancy rates, regardless of their location or price point. Dining out has become increasingly popular, and for those who prefer not to dine in, takeout orders have become the norm. It's common to see deliverers wearing the vibrant yellow or blue uniforms of Meituan or Eleme rushing in and out of restaurants or zipping through the streets on their scooters.

Gone are the days when Chinese consumers solely favored American and European brands. During my trip, I witnessed the unprecedented prominence of Chinese domestic brands. Names like Luckin Coffee and Hey Tea are no longer new to the scene, and emerging brands such as Bao Shifu Pastry, The Ally Tea (Cha Yan Yue Se), and Manner Coffee have captured the attention of Millennials and Gen Z, much more so than the Starbucks and Costa Coffees of the world.

The past few years have witnessed a rapid boom in Chinese domestic brands, fueled by venture investments. These brands are now easily discoverable on popular social media platforms like Douyin (the Chinese equivalent of TikTok) and Xiaohongshu (known as the Chinese counterpart of Instagram, although not a perfect comparison as Xiaohongshu emphasizes both text and visual content).

The potential for higher consumption

While some question the long-term viability of this consumption wave due to the decline in large-ticket purchases such as housing and cars, I believe these concerns stem from different factors. The constraints on car ownership in Chinese cities have become increasingly apparent.

Traffic congestion is a common sight in all five cities I visited, not only during rush hours but throughout the day. Parking spaces are scarce, and even private roads within residential areas are brimming with parked cars, often necessitating double parking due to space limitations. Under these circumstances, it's difficult to envision individuals purchasing cars solely to endure endless traffic and navigate the parking nightmare, unless it's a necessity driven by familial or business needs.

Similar to the vehicle market, the housing market is also reaching the natural constraints of cities. Urban areas in Tier 1 and Tier 2 cities have mostly run out of space for new construction projects. To address the housing supply shortage, many cities, especially those in lower-tier categories, are expanding their urban areas. As long as China's macro trend of urbanization continues, the housing market should enjoy long-term support.

Another favorable factor is the changing perspective of Millennials and Gen Z toward Tier 1 and Tier 2 cities. While our parents' generation still generally views these cities as more attractive due to superior job prospects, healthcare facilities, and educational opportunities, younger generations are increasingly drawn to the more relaxed lifestyles offered by lower-tier cities. Moreover, their perception of work differs as well; they seek jobs that can be performed remotely or possess transferable skills that allow them to avoid being confined to the offices of Tier 1 and Tier 2 cities. This shift, in the long run, can greatly benefit the Chinese economy by addressing the developmental inequality across regions.

Demographic headwind and opportunity

Demographics present both challenges and opportunities. This aspect is commonly discussed not only by Chinese experts but also by observers worldwide.

During my month-long stay in China, the longest period since leaving for college in the US, I realized that having a smaller population is not necessarily detrimental to China. My peers in the US often complain about overcrowding and noise in San Francisco Bay Area and New York, but compared to Beijing, Shanghai, and even Hangzhou, those cities are comparatively serene. It took me at least two weeks to adjust my tolerance to the noise levels and the overwhelming presence of people, cars, bicycles, and scooters bustling around me.

With lower population density, individuals can enjoy more personal space, fostering respect for others' privacy. The competitive landscape becomes less cutthroat, alleviating the anxiety and fear prevalent among the working class. Moreover, businesses will gradually rely less on cheap labor, instead emphasizing high-value products and services. This shift will inevitably raise GDP per capita.

Concerns about demographic headwinds primarily stem from China's previous model of success, characterized by staggering economic growth driven by investments, manufacturing, and exports over the past four decades. However, as China strives for higher living standards and endeavors to become a high-income country, this so-called headwind can be seen as an opportunity to transform the economic growth model. A greater focus on consumption, technology-driven innovation, and high-value sectors can pave the way for China's next phase of high-quality economic growth.

Two essential signs of long-term promise

Undoubtedly, challenges persist, such as the exceptionally high youth unemployment rate frequently reported in the media. Nevertheless, I believe these issues are transient, stemming from the ongoing economic transformation and exogenous shocks like COVID. The long-term fundamentals of the Chinese economy remain robust.

Allow me to conclude this article by highlighting two promising signs.

Firstly, in conversations with investor friends, I observed their continued interest in areas with high potential, such as healthcare and consumer brands, despite the current buzz surrounding generative AI. This indicates a considerable amount of capital still available for investment in exceptional ideas.

Secondly, many Millennials and Gen Z individuals have moved on from frustrating jobs within large corporations and internet giants, instead seeking freelance work, distributed employment, and entrepreneurial opportunities. This trend contributes to the high unemployment rate and underscores the keen interest I've encountered in Sora Union during my conversations.

While it may take some time for the alignment of compelling entrepreneurial ideas with the necessary capital, I firmly believe that sufficient resources will emerge to support the next wave of high-quality economic growth in China, crucial for a peaceful and prosperous world. If you are interested in learning more about any topics I touched on here, I’ll be happy to be your sounding board.