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Written by: Darius McDermott
China has the potential to be the world's best consumption story, according to Baillie Gifford.

China is now home to the world’s largest e-commerce market, estimated at $1.2trn, while consumption-related services account for 90% of the country’s GDP growth. With a population of around 1.4 billion people (more than four times the size of the United States) and around 400 million millennials making upwards of 40% of their purchases online, the figures back up this claim.

The significance of Chinese millennials

What makes millennial consumers so important is not just their scale, according to Goldman Sachs Asset Management (GSAM), but the fact that they are acting differently to previous generations. ‘Millennials’ are those born in the 1980s and 1990s, so they are between their late teens and mid-30s.

This group represents the first generation of “digital natives”, GSAM points out. China’s millennials spend around four hours a day on their mobile. From waking up to the alarm clock, checking ‘WeChat’ for messages and news, booking a table for lunch, calling a taxi, watching TV or listening to the radio, buying groceries, depositing money… everything is done on their mobile.

Secondly, they exhibit very different priorities to their parents. Instead of looking to simply improve their basic standards of living, this generation is more interested in the finer things in life.

For example, 11 November is China’s ‘Singles day’. As the name suggests, it’s a day for single people. It was adopted by Alibaba – one of the world’s largest and most valuable retailers – to promote online shopping in 2009. It has been a huge success so far. Last year, $18bn was spent on Alibaba alone. Compare this with an estimated total of £1.23bn for Black Friday sales in the UK.

China is rapidly moving up the value chain from a maker to an innovator. As its middle class expands, the potential for growth in consumer spending is enormous.

A tech bubble or just a beginning?

Alongside Alibaba, Tencent is another stock that is able to cash in on growing digital consumer spend. It’s a bit like Facebook, Just Eat, Uber and Paypal – all rolled into one.

However, Tencent is not cheap. While some say its valuation is starting to look like those reached during the tech bubble, there are some important differences. Unlike 2000 when valuations lost sight of fundamentals, Fidelity believes that a structural shift is taking place in China today. In their opinion, well-developed business models and strong earnings growth support valuations.

Fidelity China Special Situations holds Tencent in its top 10, as does First State Greater China Growth. According to First State Stewart, Tencent’s Tenpay (which owns WeChat Pay) has grown its market share and is catching up to leader Alipay in the mobile payments segment. Together, Tenpay and Alipay are responsible for more than 90% of e-payments in China – the biggest e-payments and e-commerce market in the world.

India’s huge e-commerce potential

China isn’t the only country that is experiencing structural change. India is also home to around 400 million internet-savvy millennials.

According to Fidelity, India’s digital revolution could eclipse other countries, given the forecast that compound growth rate for online retail will be 31.2% per annum between 2016 and 2020, compared with 9.9% for China.

A positive side effect of demonetisation in India last year has been the significant adoption of e-wallet and mobile payment platforms. Demonetisation saw the government surprise the population by demonetising 500 and 1000 rupee notes in a bid to crack down on corruption and black market money.

India is still a cash-driven economy, but the number of mobile payment transactions is now estimated to grow from 2.9 billion last year to upwards of 450 billion in five years’ time. This would mean that it has a value of over $4trn.

The Asian consumer is a long-term trend that should prove profitable for investors. As with all themes, it will have its ups and downs. Particularly as there are a number of concerns about other areas of the Chinese economy at the moment. Nevertheless, I would expect patient investors to be rewarded over the long-term.

Darius McDermott is managing director of Chelsea Financial Services

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