There has been a huge shift from manufacturing to services in China in recent years, and the economy continues to transition away from growth driven by fixed-asset investment, to consumption-focused growth, particularly through consumer services. This is led by private enterprises that are run with a profit motive and tend to be less capital intensive, unlike the fixed-asset boom, which was dominated by state banks funnelling credit into other state-owned entities and property developers.
With the fixed-asset intensity of the economy declining, GDP growth is likely to continue to slow, however the quality of growth is set to improve. A slower rate of GDP should not, in our view, hinder the consumer-facing areas of the economy particularly, as the labour share of GDP increases and because many service industries are still quite nascent.
Consumption-focused growth will spur on tertiary industries that represent a growing share of GDP and dominate the growth contribution. Additionally, policy changes bode well for service sectors, such as education, healthcare, insurance and internet-based businesses.
Rob Marshall-Lee, investment leader emerging and Asian equity team, Newton Investment Management.