Why China’s domestic brands are thriving

As China scales back on its resource-intensive industries, some of its trading partners are feeling the squeeze. That group includes economies such as Brazil, Russia and Australia.

“China is trying to rebalance its economy to skew growth toward consumer spending and away from pure fixed-asset investment because of excess capacity, [and] the economies and sectors that will be hurt will be those that are related to basic materials,” says Kenrick Leung, director of investment for Greater China equities at Amundi in Hong Kong. He manages the Renaissance China Plus Fund.

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To date, he adds, “Basic materials and energy markets have benefited greatly from the big infrastructure build-out in China for the last decade or so. If you look at the overcapacity that has been built in China, it would take many years to work off.”

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But, while there will be a slowdown in infrastructure and fixed-asset investment from this point, says Leung, investors should know China is mainly shifting its focus from long-haul roads and bridges to projects within cities. These “take up much lower amounts of basic material compared to what was used in the last decade or so.”

Meanwhile, China’s homegrown companies are blossoming as the spotlight shifts toward domestic spending and consumption, says Leung. “In order to promote domestic spending, domestic wages have been going up. Minimum wage growth has been pretty steady over the last few years.”

And, this is “ultimately creating a wealthier middle class,” he adds, with the focus shifting toward the middle or upper-middle tier of spending.

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However, even though consumerism and domestic spending are on the rise, says Leung, the appetite for luxury brands is waning due to rigorous anti-corruption crackdowns. “Consumer spending over the last few years had been focused on premium, international brands such as Prada and Louis Vuitton,” Leung explains. “But that has shifted. […] The wealthy are now spending more on lower-tier brands, [while] the middle class is moving up to spending on low-end premium brands.”

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The upside of this trend is domestic companies are benefiting. That group includes Li-Ning and ANTA Sports, both of which are sports brands that have lagged over the last five years due to over-expansion. Now, there has been some consolidation in that market area, and these companies have improved their point-of-sale practices, Leung notes. So, “we’re starting to see a resumption of same-store sales [for] some of these domestic sports apparel brands.”

In China’s auto industry, people are also buying more domestic product, he adds; those products include local brands like Great Wall Motors and Geely.

Still, brands such as Apple and Nike continue to do well in China, Leung says: “That’s what the emerging middle class aspires to consume.”

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