On June 10, 2016, Founder and CEO Eric Kramer and Senior Investment Analyst Lindsay Searer returned from a ten day trip to China, the world’s second largest economy and one of the U.S.’s largest trading partner. In the course of the two weeks, Eric and Lindsay met with every major player in the Chinese venture capital and hedge fund space, leading real estate investors, and two of the most prominent family offices in the world.
On the whole, China's economy is growing but at a much slower pace as it shifts from an investment-fueled to a consumption-fueled economy. Most of the economic activity is occurring in the new consumer-driven sector. Consumer spending will become the new economic growth engine – and demographics are in China’s favor as there has been significant income growth and growth of the middle class. The change from China’s one child policy to a two child policy could drive some of this growth with 20 million babies born every year. This new generation of those coming of age will be much more consumption-driven than savings-focused as were previous generations.
Based on Crestone’s meetings, the only way to access the Chinese consumer is through the internet – consumption and shopping are no longer happening in “bricks and sticks” but online via mobile applications. In these spaces, the market is typically winner take all or winner take most – and the top position usually goes to local players, like Didi Chuxing, Alibaba, JD.com, Tencent, and Xiaomi. These local companies are also supported, some may say favored, by the Chinese government who is pushing for consumer growth given the slowing overall economy. It has set aside a large stimulus package specifically targeted at helping local internet companies through low interest loans, subsidies, tax breaks, free offices and warehouses. Further, cultural differences make it challenging for U.S. based companies to become market leaders.
Crestone is well positioned as it has been investing in Chinese internet and technology companies for over ten years. Although some may call it the “wild wild east”, we feel confident that this secular theme in China is still strong. Travel facilitates learning and perspective – this trip has better positioned us to take advantage of current and future opportunities and further strengthen our bench of smart and thoughtful managers taking advantage of this theme.