1/31/2013 4:30 PM ET|
How to play China's 'rural' rise
China's migrant workers aren't really rural at all -- and employees who live in small and midsize cities are transforming the nation's economy.
When China's leaders introduced the country's 12th five-year plan, in March 2011, it included the wildly ambitious goals of rebalancing the economy away from exports and toward domestic consumption, of closing some of the huge gap between rich and poor by raising the minimum wage by at least 13% a year, on average, and of reducing rural poverty by extending programs such as pensions across the country. All while keeping the economy growing by 7% a year with stable prices.
You don't suppose they actually meant it?
Absolutely they did, recent data say.
In 2012, rural incomes rose faster than urban incomes -- for the third consecutive year. Rural income from benefits payments rose 21.9%, twice the rate in urban areas, as the government increased its spending on health care subsidies by 36%. And because poor families tend to consume a higher portion of their income than the wealthy, the growth in rural incomes should help with the goal of rebalancing the Chinese economy toward consumption.
What does this mean for investing in China?
It's certainly not time to throw out the traditional model, which has stressed the shares of exporting companies and the commodity producers that fuel their growth. Nor is it time to abandon the shares of companies that cater to the rising incomes -- and in some cases rising wealth -- of city dwellers. China's urban population accounts for about 53% of its total population of 1.35 billion, according to the National Bureau of Statistics. But rural spending in 2012 was less than a fifth -- at $447 billion -- of urban spending.
Still, given the trend, I'd recommend adding a stock or two or three from companies positioned to profit from growing rural incomes. Retail sales in rural regions grew by 14.5% in 2012, faster than the 14.3% growth for retail sales in urban areas. That's a new development. (Growth for both rural and urban retail sales was down last year from the 16.7% and 17.2%, respectively, recorded in 2011.)
But to understand which companies will do best in this changing Chinese landscape, you have to understand that the biggest beneficiaries of a rise in rural incomes aren't actually rural areas, but China's small and medium-size cities. In this column, I'm going to begin by explaining how China's "rural" trend works to benefit China's smaller urban areas. And then I'll give you the names of some stocks I think are well positioned to profit from the way rising "rural" incomes work on the ground in China.
Money to spend
There's no doubt that rural incomes are rising. Rural per-capita net income grew 10.7% in 2012, according to the National Bureau of Statistics (versus 9.6% for city dwellers).
Part of that is an increase in government "transfer" payments for pensions and health care. Part of it is an increase in farm incomes as agricultural production and prices rise. But a big part of the increase comes from growing wages for China's army of migrant workers -- 230 million by official count -- who aren't really rural at all.
China's system of household registration -- known as hukou -- prevents migrant workers from rural areas from getting permanent residency status in the urban areas where they work. They make their money working in the city (and their wages are rising, thanks to government policy and China's growing shortage of workers for factory jobs). But these workers are still officially residents of the rural towns they came from. They aren't eligible for education or health care in the urban areas where they live. Further, their incomes count as rural for official statistical purposes.
In February 2012, the State Council announced a major effort to tackle the unregistered-migrant-worker problem. The government will implement a policy to help migrant workers register in urban areas -- but not in all of them. The government will continue policies to limit the growth of the country's biggest cities, such as Shanghai and Beijing.
The new registration policy will be targeted at helping migrant workers attain residence status in small townships and in small and medium-size cities. In effect, as these policies are implemented, migrant workers who are now registered in rural areas will become residents of the small and medium-size urban areas. From the point of view of government statistics, they will take their incomes with them. In reality, many of these workers will move their families from rural areas to these small cities, where they will see their discretionary incomes increase as they become eligible for government-funded education and health care.
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