August 3, 2020 BARRON’S 17
Chinese Consumers Are Back—Sort of
More than half of Chinese consumers expect their spending
tobethesameorhigherthanayearago,accordingtothe
latest consumer surveys by UBS Evidence Lab.
Spending patterns have changed. Here are five areas
consumerssaytheyplantospendmoreinthenext12months
and five areas where spending is expected to decline.
Source: UBS
Change of consumption
in next 3 months
Higher than
past 3 months
and last year
12%
Higher than past
3 months but lower
than last year
24%
Higher than past
3 months and same
as last year
22%
Lower than past
3 months and same
as last year
19%
No impact
14%
Lower than past
3 months but higher
than last year
5%
Food & beverage
-20% -10 0 10 20 30
Cosmetics & skin care
Clothing
Decoration & furniture
Handbags & jewelry
Education
Travel
Sport/gym
Dining out
Offline entertainment
Lower than
past 3 months
and same
with last year
3%
I don’t
know
1%
companies are likely to benefit.
Buying Everything Online
Almost a quarter of retail sales in
China were done online through May,
about double that in the U.S., as more
shoppers in smaller Tier 3 and Tier 4
cities and even older Chinese turned to
e-commerce for everything from gro-
ceries to education. It’s a trend that
fund managers expect to become a
habit, forcing business models to
change and those already well posi-
tioned to benefit as industries consoli-
date. Much like in the U.S., the internet
winners pre-Covid—Alibaba Group
Holding(ticker: BABA),JD.com(JD),
Tencent Holdings(700.Hong Kong)
New Oriental Education & Technology Group
Technology Group(EDU)—have
strengthened their hand with an in-
crease in e-commerce, cloud-comput-
ing, live-streaming, and gaming offer-
ings, as well asonline education.
Their shares have logged double-
digit gains this year, but money manag-
ers still see opportunity, given their
strong positions in areas where con-
sumers are spending heavily. “If you
look at the cash-flow yield of Alibaba
or do a sum-of-the-parts analysis and
give them credit for what they are
achieving in cloud computing or digital
payments or the migration of more
commerce online, there is quite a lot of
value,” says Eidelman.
Some Chinese companies with
shares listed in the U.S., such as JD.com
and Alibaba, face a possible delisting
push in Congress as U.S.-China ten-
sions flare. But money managers view
volatility as near-term noise, especially
as any changes would probably play
out over time and these companies
have secondary listings in Hong Kong.
Health and Wellness
As Chinese consumers became
wealthier in recent years, they focused
increasingly on health and wellness—
a trend that has been further boosted
by the pandemic. That has translated
into more demand for athleisure ap-
parel and footwear, helping the recov-
ery of companies such asNike(NKE),
which has been especially innovative
in driving engagement and spending
through its training apps, says Ramiz
Chelat, a manager who subadvises the
Virtus Vontobel Global Opportunities
fund. It also extends to a preference
for quality healthful snack products,
where local players likeChacha Food
(002557.China) have performed rela-
tively well, Chelat says.
Chinese diners are favoring bigger
brands as they begin to venture out,
seeing them as more aligned with food
safety. That benefits big chains like
Yum China Holdings(YUMC) and
Haidilao International Holding’s
(HDALF) Haidilao Hot Pot, whose
scale also helps them deal with the
postpandemic costs better than mom-
and-pop restaurants that are strug-
gling, Eidelman says.
Cutting Back on Jet-Setting
Chinese travelers were the world’s big-
gest tourists, with 150 million traveling
abroad in 2018. They were also big
shoppers in fashion capitals such as
Paris, Milan, and London, representing
13% of global luxury sales last year.
But the outlook for overseas travel
remains murky as the pandemic rages
in different parts of the world and
countries continue restrictions on visi-
tors. There is also a growing backlash
in the U.S. and some other parts of the
world against China. UBS doesn’t see
overall travel demand getting back to
2019 levels until the end of 2021.
Some of that travel budget is being
redirected, fueling a recovery in real
estate and more spending on premium
products. Three-quarters of respon-
dents in UBS’ China consumer sur-
veys said they would pay more for
better products. Income growth in the
largest Tier 1 cities has been stronger
than in smaller cities, a reflection of
service income holding up better than
manufacturing, Chelat says.
More Home Improvements
While the do-it-yourself home-
improvement trend that has benefited
companies likeHome Depot(HD)
isn’t as popular yet in China, fund
managers see a greater willingness
among the Chinese to spend on mak-
ing their homes more comfortable and
healthful. One beneficiary:Midea
Group(000333.China), which is in-
corporating air-purification features
into air-conditioner products. It is also
seeing increased demand for rice
cookers and blenders, as people cook
more at home, says Wenting Shen, a
China analyst at Harding Loevner.
Lili Wang, 44, an account manager at
a bank in Chengdu, said in an interview
that she and her family “spent quite a
bit less” during the lockdown, and are
now using the savings for purchases for
a new apartment that range from light
fixtures to a treadmill to a “major make-
over” of the kitchen, rather than the
originally planned minor upgrade.
ury products. While consumers are
less interested in apparel or jewelry,
money managers see increased de-
mand for higher-end cosmetics and
skin care. They say customers still
favor foreign brands such asEstée
Lauder(EL). Some diversified luxury
makers likeLVMH Moët Hennessy
Louis Vuitton(MC.France) and
Kering(KER.France) have a strong
digital and onshore presences in
China, making them well positioned
for the change in shopping patterns.
That should help to offset some of the
lost revenue once derived from Chi-
nese tourists traveling abroad.
Yilin Zhang, a 26-year-old German
and English teacher who lives in
Chengdu, said she makes most of her
purchases online, and the pandemic
has affected her spending on luxury
items. “I don’t really buy much jewelry
or [many] purses, but after the pan-
demic, I said to myself, ‘You never
know how long you’re gonna live,’ and
I’ve been buying more upscale clothes.”
The Chinese government has re-
laxed restrictions around domestic
duty-free zones, increasing the
amount of money that people can
spend, and cutting taxes. “Instead of
traveling overseas to buy duty-free
cosmetics or luxury bags, they are
rerouting some of that spending to
places like the tropical Hainan duty-
free island,” Shen says. One benefi-
ciary isChina Tourism Group Duty
Free(60188.China), Shen adds.
The Chinese consumer has a head
start on recovery versus global peers,
but it is unlikely that she will be able
to carry the global economy with her.
Chinese officials have been more re-
strained in their stimulus compared
with past downturns, curtailing de-
mand for commodities and other ex-
ports. Consumers have also shown a
preference lately for domestic brands
in areas including hotels, dairy prod-
ucts, and sportswear. “There’s a sense
of national pride that the country
went through a difficult period and
everyone sacrificed,” Goei says.
For investors looking to buy shares
of consumer-discretionary companies
that generate nearly all of their sales
in China, theGlobal X MSCI China
Consumer Discretionaryexchange-
traded fund (CHIQ) is one option.
A consumer rebound could take lon-
ger in the U.S., as the virus isn’t yet un-
der control, but China’s recovery shows
there’s light at the end of the tunnel.B
Additional reporting by Tanner Brown
“We’re making it nicer than we
would have, both because we have a
bit more money and because we real-
ized you better make it somewhere
you like because you’re going to be
spending a lot of time there,” she said.
Luxury Goods in Demand
There is also demand for certain lux-
