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China's Economy Is Cooling, But Nobody Told Its Internet

6 June 2014 in Trading Ideas

Recent online spending data from the world’s most populous country has had two effects: It has provided a bright spot for an economy that is expected to grow by its least amount since 1990, while also underscoring a significant shift in the spending habits of its citizenry.

All of which, of course, happens to come as Alibaba, the biggest online marketplace on Earth, prepares for a US initial public offering with an estimated market value of $168 billion.

As Bloomberg reported last week, China’s statistics bureau said that online retail sales jumped 52% in the first four months of 2014, compared with a 12% hike in overall retail sales.1

 

The bid by Alibaba and others to lure the country’s 618 million users to shop online appears to be paying off – even beyond the recent results, Shanghai’s iResearch Consulting Group sees annual growth of 20% to 30% in Internet purchases over the next three to five years.

“Online shopping has unleashed consumer demand, particularly because people can now buy stuff online they couldn’t get before in the shops, especially outside the biggest cities,” Song Yu, senior China economist with Goldman Sachs Group, told Bloomberg.

Other industries within the country’s web sector have also exhibited considerable strength.

According to JPMorgan data, China’s mobile games market has grown rapidly since the second quarter of last year, with sales expanding by 40% quarter-on-quarter to $705 million in the first quarter this year. An expansion in mobile game users underpinned the rapid growth. There were 300 million mobile game users by the end of the first quarter.2

And Chinese mobile game users are serious. A large number of them play core games, whereas in the US, casual games are the mainstream, JPMorgan said. As a result, over one-quarter of Chinese mobile gamers spend over an hour a day, and China’s average revenue per paid user was around $32.50 in January, well above $21.60 in the US.

The widespread user growth has also been a boon for Chinese internet stocks. The China Internet motif has increased 65.5% in the past 12 months. In that same time frame, the S&P 500 is up 22.3%.

Over the past month, the motif is flat; the S&P 500 has gained 2.3%.

The inevitable question for investors will be to decide how many of China’s internet stocks can continue to deliver gains on their current growth expectations, however Alibaba IPO hoopla this summer may work to suspend scrutiny for longer than usual.

1Bloomberg News, “China Online Spending Power Unmasked,” Bloomberg.com, May 27, 2014, http://www.bloomberg.com/news/2014-05-27/china-online-spending-power-unmasked.html, (accessed June 4, 2014).

2Shuli Ren, “China Mobile Gaming: Trends; Qihoo, Baidu, Tencent Big Players,” barrons.com, June 4, 2014.

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