China's millennial moment

Note: This video is part of Morningstar Canada's Women in Investing Special Report

Andrew Willis:Millennials in China are beginning to flex their consumer might. They have rising incomes, they are technologically savvy, and they are helping to drive a $1 trillion ecommerce evolution. In China, there are at least 400 million of them and they are connected making myriad daily purchases by phone and opening a world of possibilities for new revenue channels and investment opportunities within a massive marketplace.

Regina Chi is Vice President and Portfolio Manager at AGF Investments, and she calls this the emerging market millennial moment. She holds an overweight allocation to China in her AGF Emerging Markets Fund and says that Chinese millennials are a force to be reckoned with.

Thank you for joining us, Regina.

Regina Chi: Thanks so much for having me.

Willis: Now, China has 5 times the population of millennials than in the U.S. which makes you wonder about the kind of purchasing power this group has. Could you tell us a little bit about the kind of disposable income this group has available to them today?

Chi: That's absolutely right. 400 million Chinese millennials. That amounts to almost 30% of the total Chinese population. But if you consider this from a different perspective, these 400 million Chinese millennials against the U.S. total population of 330 million people, the cohort is just enormous. So, you can't ignore the long-term consumption patterns of the Chinese millennials.

What we've found is that the Chinese millennials are much more affluent than the older generation and that's for two reasons. First, they have access to accumulated capital and savings from their parents and grandparents. Remember that China has had a one child policy since 1979. And so, what this means is that there are six adults, two parents and four grandparents for every one child. And so, we've seen a change in consumption patterns toward higher education, more discretionary spend toward travel, premiumization, consumer upgrade cycle. And so, these trends can't be ignored. The second reason why Chinese millennials are much more affluent is the fact that the disposable income has increased 10% per annum since 2010. So, together they are willing to spend much more than their parents.

Willis: Now, one of the attributes often associated with millennials is their technological savviness. What does a connected millennial marketplace look like in China and how does it translate into spending patterns and sales channels? Are we looking at growth predominantly in the digital Chinese marketplace?

Chi: Sure. So, with the sheer size of the Chinese millennials on top of the high adoption rate for smartphones, ecommerce penetration rate in China is among the highest in the world, close to 25%. This compares to the United States and U.K. at less than 10%. So, effectively, the smartphone has become a digital wallet and it's allowed the consumers, the Chinese millennials, to buy more goods online, but also, it's offering them a huge ecosystem of experiencing the services like food delivery.

Currently, right now, half of the disposable income is going to food as well as clothes. But what we are seeing is that there's an increasing change in this pattern toward more discretionary spend like travel. International travel outside of China has grown 12% per annum for the last 5 to 7 years and we think that his runway for growth is quite significant because less than 5% of the Chinese population has a passport. But similar to the developed market millennials, the Chinese millennials like to do exactly the same thing, which is spending a lot of time online. That's not only buying things online but playing games online, watching live broadcasting, live streaming as well as reading the newspaper.

Willis: Now, is the influence of Chinese millennial consumers crossing borders? Are we seeing the growth in China tech-based companies reach consumers outside of China?

Chi: That's a great question. So, we do see the influence of Chinese millennials crossing the borders in two ways. First, as I mentioned, the Chinese millennials are travelling abroad outside of China mainly to neighboring Asian countries like Japan, Korea, Taiwan. And so, what I've been seeing is that these emerging countries close to China are actually accommodating their taste and demands as well as their forms of digital payments like Wipay as well as Alipay.

The second way that I'm seeing the influence across borders is that you're seeing the large innovative Chinese companies like Alibaba and Tencent really broadening their reach in Southeast Asia which is actually home to at least 25 million ethnic Chinese who are already used to the services and the goods that they have from their home country.

Willis: Now, does this translate into opportunities for global firms to tap into the local Chinese marketplace?

Chi: Well, unfortunately, the foreign firms have not done a great job in terms of expanding in China or actually surviving in China. Some are still trying like Google. But other companies like Groupon and Uber have left the country. And that's because the Chinese market is incredibly competitive and the internet market or the ecommerce space is even more fierce. And I think that has mainly to do with the fact the innovation rate in China is very fast and the American companies or the multinationals really can't keep up.

Willis: Thank you again for joining us, Regina.

Chi: Thank you so much for having me.

Willis: For Morningstar, I'm Andrew Willis.