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Which megatrends merit investment?
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In 2003-2004, Hong Kong-based Chang Sun, managing director of private equity firm Warburg Pincus, surveyed prominent economists and researchers on China’s megatrends for the next decade.
The megatrends include: massive urbanization and growth of megacities; emergence of a large, upwardly mobile, relatively affluent middle class; growth in financial services; continued large investment in physical infrastructure; global outsourcing of manufacturing to China; emergence of strong, well-managed domestic companies; aging of the population; environmental degradation and pollution; modernization of agriculture; and deregulation of healthcare and education.
Despite such challenges as excess capacity and imbalanced growth, Sun believes China has the potential to create world-class enterprises in the next decade. Excerpts of a recent conversation between Sun and Knowledge@Wharton:
Q: Some trends of the past decade might speed up; others may slow down. Which merit closer attention?
A: We are now researching the megatrends for the next 10 years. We think that financial system reform, the aging population and environment deterioration might become more important in the future.
The financial sector has been lagging behind for the past 10 years. In many industries, private sector companies have increased their presence.
But finance and energy are the exceptions.
In the banking sector, no private-owned bank is in top five. In insurance, only Ping An Insurance is among the leading players. Securities companies have complicated shareholder structures after institutional reform and, on the face of it, state-owned companies are still mainstream.
In the next 10 years, driven by the growing economy, we anticipate that financial reform will give a big boost to financial industries.
The logic is threefold: First, when per capita income surpasses a certain level, investment demand stimulates the growth of financial markets and products.
Second, in an aging society, people will increasingly need to save and invest for their retirement.
Third, the expansion of social security funds, pension funds, mutual funds and insurance funds will stimulate the demand for bandwidth, quality and categories of financial service.
The new government has repeatedly said it will support financial innovation.
Opening up some of these areas to the private sector will bring more investment opportunities.
Aging population
Right now, the growth of the aging population is accelerating and the disadvantage of the one-child policy is being increasingly exposed.
Even if you change the policy today, the newborn will need 20 to 30 years to enter the labor market.
Meanwhile, how do you sustain the social pension system in the next decade, and how do you satisfy the aging population on service and benefits? These questions need closer scrutiny.
On environment, people now have a stronger desire for a better environment. In the past 30 years, this was sacrificed for high growth.
Plus, as mentioned earlier, the news spreads rapidly once an issue has been highlighted. Environmental conflicts are getting more intensified across the country, which has led to painful choices for both the government and companies.
Q: What are the opportunities in the finance sector?
Sun: The global experience is that when per capita income exceeds US$5,000 to US$10,000, the financial sector takes off. Up to now, the industry has faced entry barriers and cumbersome regulations.
But I believe that once there are more reforms, new models of financing and investment will spring up. For example, online financial products. The Internet has been growing explosively in China in recent years.
Companies that leverage the Internet to offer financial services will have excellent opportunities. Traditional financial institutions will be slow to transform online, and newly born companies will find it easier to get ahead.
Alipay (the Alibaba Group’s online payment company) has leveraged its strong online business (Taobao.com) to offer convenient online payment tools for clients.
In the future, online payment, online banking, online insurance and many innovative products will flourish.
Q: How do you see the property market?
A: Most people are concerned about the skyrocketing residential property price, a sensitive topic today. However, residential is only part of it. Property includes commercial, industrial, tourism and logistics properties as well.
The future of the market is closely connected with land policy reform. The skyrocketing residential property price originated from the imbalance between supply and demand in the land market. Land is in short supply in big cities. But in the rural area and tier III and tier IV cities, the land utilization rate is very low.
In the current system, farmers don’t own their land. In addition, land is tied to the household registration system, which restricted labor flow.
It’s time for reform in China’s land system. If reform did happen, what is there for investors? Farmers can move from operating small farms to modern agriculture and big farms.
Land reform and changes in household registration norms can help to stabilize the floating population in their working cities and further promote the opportunities for education and health care.
Adapted from Knowledge@Wharton, http://knowledge.wharton.upenn.edu. To read the original, please visit: http://knowledge.wharton.upenn.edu/article/sun-chang-warburg-pincus-chinas-megatrends/
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