The most important investment trend in China is the demographic shift of its citizens away from the farm. Over the next 20 years, about 13 million Chinese (roughly the entire population of Denmark and Switzerland) will move annually from rural environments into urban settings. The real key to this shift is the wealth it will create.
People living in urban areas will find better-paying jobs than those in rural areas. Urban incomes rise twice as fast as rural incomes because of the opportunity and flow of capital that comes into those areas. The key for you and your clients is to figure out who will be spending these rising incomes, and what they'll be spending it on.
My advice: Keep an investment eye on the next generation of young Chinese consumers. Over the next 20 years, a majority of the Chinese population under the age of 15 will be located in cities. Due to China's one-child policy, most of these children are "only" children with all of their parents' hopes and dreams pinned solely on them, instead of being dispersed among several siblings. The desires, tastes and spending habits of this generation may radically reshape the business climate, social fabric and political institutions-not just in China, but in the entire world.
Consider the cosmetics industry. Traditionally, a pale complexion in China had been desirable. Women with darker skin tones or tanned complexions were viewed as farm workers and often said to have the "peasant" look. In addition, it was believed that anyone who wore makeup was trying to hide something-a practice that was shunned. Not so much anymore. China is experiencing a cultural revolution. Once color TV made its way to China, people quickly realized that America, Europe and even Japan had different ideas of beauty. Furthermore, as more Chinese women traveled outside of China, they gained a new perspective firsthand. Fast-forward to today and cosmetics is booming. This boom has been driven by two factors. First, the overall rise in the standard of living has boosted consumer spending across the board. Second, these young consumers are willing to spend much more of their hard-earned disposable income to look better.
As an investor, the most crucial point in understanding the potential impact of the younger generation in China is to realize that this group was born into a world that's radically different from the one in which their parents grew up.
For the most part, the parents of this age group were left scarred and desolate by World War II. The postwar era for these parents required hard work, dedication, individual sacrifice, high savings, productivity and conformity. These attributes have underpinned the industrial rise of China over the past half-century.
This, however, isn't the world in which China's teeming population of youth is growing up. They find themselves in an era of prosperity rather than poverty, and have opportunities and wealth that their parents didn't have. Shopping is more characteristic of this group than saving.
Their parents drank tea, wore sandals, ate rice, bought things with cash, and lived lives centered on Buddhism. Not so for this under-15 generation. While their parents drank tea, they drink Coca-Cola. Their parents wore sandals; they wear Nike tennis shoes. Their parents ate rice; they eat fast food. Their parents bought everything with cash; they buy things with credit cards, forcing more Chinese merchants to embrace their world of purchases with plastic.
As a by-product of China's economic success, its younger generation is also better educated, and more willing and able to travel abroad than their parents were. Leisure time, convenience, individualism, indulgence, spending and other Western habits permeate this generation. This is a radical shift in the mindset and actions from their parents' generation.
We can learn a great investment lesson about how this might play out by simply looking at our own baby boomer demographics.
Anyone who was born in the U.S. between 1946 and 1964 is classified as a baby boomer. There are 76 million of them. Unlike their parents, baby boomers had no firsthand experience or any childhood recollection of World War II. Many of these baby boomers either fought in the Vietnam War, or organized and participated in anti-war demonstrations. Relatively low college costs made college education more widespread. For the most part, there was peace in the world. Travel was both cheap and easy. At the same time, mass communication was booming.
Together these factors were the foundation for the cultural and philosophical awakening of the baby boom generation.
These baby boomers were responsible for the creation of the diaper industry, the explosion of fast-food restaurants a decade later, and now the health and fitness craze as they want longer and healthier lives. From an investment perspective, the baby boomers changed everything.
Think of these young Chinese consumers as our baby boom generation times four or five.
For argument's sake, assume that an unthinkable 25% of this age group never buys a single thing during their entire lives: Never buys a Coca-Cola, never sees a Nike "swoosh" or wants an iPod. The other 75% (195 million young Chinese consumers) would still represent a demographic group the size of Germany, Ireland, Spain and the United Kingdom combined. It could still be the greatest demographic consumption bubble ever.
This consumption bubble begs investors to answer this question: Do you own the consumer-related companies positioned to satisfy the wants and needs of China's new, young, consumer generation?
Just think of what this generation could be purchasing soon: beverages, fast food, cell phones, cigarettes, jeans, shampoo, cosmetic products, cars and every cool technology gadget that hits the stores.
Maybe the biggest investment impact from this consumption boom will be in a place where very few investors look: electric energy. After all, computers, cell phones and appliances all run on energy-in particular, electric energy. Over the past 30 years, kilowatt-hours of electricity consumed by each person in China has gone straight up. In fact, it's up more than 400%.
For perspective, annual electricity consumption per person in the U.S. stands at 12,000 kilowatt hours. In China it's less than 1,000 kilowatt hours-only about 8% of U.S. consumption. As Chinese consumers continue to buy more products that require energy, China's kilowatt hour consumption patterns will look more and more like that of the U.S.
After all, if you can't plug it in, then you can't turn it on-whether you're down on the farm or not.
Bob Froehlich, Ph.D., is an executive vice president and chief investment strategist of Wealth Management for The Hartford.