China economic growth and the role of digital yuan

January 28, 2021

It has been a year since COVID-19 emerged, and the world is still struggling to contain the virus. In the past year, the nations and regions that had better control over the virus have seen faster economic recovery. China, for example, announced that their 2020 Q4 GDP grew by 6.5% year-on-year, which has surpassed the GDP growth of 6% in Q4 2019. This brings China’s 2020 GDP growth to a total of 2.3%. By comparison, the United States (US), Eurozone, and Japan are forecasted to contract by 3.6%, 7.4%, and 5.3%, respectively.

For China, industrial production was the growth engine, increasing by 2.8% in 2020, as global demand for medical equipment, home improvement products, and home office electronics was strong. Despite overall consumption lagging production, online retail sales posted a solid 15% growth. Online channels accounted for one quarter of total retail sales, up from just 4% in 2019. Companies we hold in our portfolios also benefited from the strong online retail growth in China. L’Occitane, for example, is a maker of natural and organic ingredient-based cosmetics and well-being products. Their online sales in China grew by 83.5% in the six months ending September 2020, and accounted for approximately 32% of their total China sales. It was ranked the number 1 brand for body care and hand care on T-mall, the largest ecommerce platform in China. Similarly, online sales of Asics, a manufacturer of sports shoes and sports apparels, more than doubled in the nine months ending September 2020, and accounted for over 30% of its sales in China. Also, profits of the beverage manufacturer Vitasoy increased by 27%, as online and home channels delivered strong results.

The fast growth of ecommerce also boosted logistics demand. According to the State Post Bureau, China’s total express delivery volume rose by 37% in December 2020, following the 37% and 43% growth in November and October 2020, respectively. Kerry Logistics, a third-party logistics service provider we own in our portfolios, has benefited from the surging domestic and cross-border shipping volume. The number of cross-border ecommerce consignments they handled in the first half of 2020 increased by 24% compared to last year. In addition, the strong overseas demand has driven the cost of shipping from China to Europe and the US to triple or quadruple in recent weeks. As one of the few Asia-based global freight forwarders, Kerry Logistics has leveraged its unique market position to capture the growing demand. Its international freight forwarding segment profits increased by 40% in the first half of 2020. Another positive update on Kerry Logistics is the completion of the spin-off of its subsidiary, Kerry Express Thailand, in late December. The listing was well received by investors, with its shares rising as much as 161% from the IPO price in debut. In addition to ecommerce, the potential distribution of COVID-19 vaccines could also help drive the company’s revenue and profit growth. Kerry Logistics has nearly one million square feet of cold chain facilities in Hong Kong, and is well equipped to handle drugs, including vaccines, antibiotics and insulin.

China has been leading the world on the digital payment front, with the highest mobile payment penetration rate of 32.7%, versus 15% in the US. The Chinese government has taken a step further to start testing the use of its own digital currency, Digital Currency Electronic Payment (DCEP), which is a digital version of its official currency, Yuan. Pilot projects have been ongoing in Shenzhen, Xiong’an, Chengdu, and Suzhou since August 2020. The official rollout could be as early as 2022. DCEP’s share of China’s digital payment market is expected to reach 9% in 2025, and 15% in 2030. To be launched domestically first, the digital Yuan will help smooth monetary policy transmission and help policymakers regain control over money flow and consumer spending data from Alipay and WeChat Pay. Eventually, it could be used to promote the Yuan’s global status and become China’s preference for cross-border payments, bypassing the Swift network amid rising tension with the US.  

On the political front, we don’t expect the US-China relationship to improve significantly under the Biden administration, although the two countries might collaborate on matters such as fighting climate change and COVID-19. Meanwhile, the delisting of Chinese stocks in the US seems to have had a positive impact on the Hong Kong stock exchange, as investors in mainland China are shifting attention to the cheaply valued Hong Kong listed stocks. This helps the Hang Seng Index to be among the best performers in the region so far this year. This trend is expected to continue, with investors shifting out of A-shares to H-shares. We continue to have high convictions that the companies we hold in this region will outperform, supported by their competitive product and offerings, and solid balance sheet. 

Global Alpha Capital Management Ltd.
January 28th, 2021