It is a crisp winter's afternoon in Kunming, the fourth largest city in Western China and a city of great significance during World War II as a key military centre, with an American air base and the transport terminus for the Burma Road. Unprompted, we were asked by the middle-aged Didi (Chinese equivalent of Uber) driver: “How would you score President Xi?” After offering an unflatteringly low score, the driver from a small town hundreds of miles away chuckled and said: “That’s maybe a bit too harsh. I will give a 60 out of a 100, just about passing.” This surprising openness underscores an increasingly clear observation of what we call the ‘great resignation and disillusionment’ in China.

The China bear story has been well broadcast by now. A troubled property market, problematic and high local government debt, collapsing birth rate and demographic challenges all led to low business and market confidence, and significantly derated China assets. Looking at the asset prices, it is hard not to wonder whether the China growth story has ended.

We have just spent an extensive three weeks together in a dozen cities, from glitzy Shanghai to the sleepy backwater town of Fanchang that has just welcomed its first Starbucks, from the always hustling technology hub, Shenzhen, to exotic and sun-drenched Banna – China’s ‘mini Thailand’ – full of tourists escaping a northerly winter. After this, we believe the China growth story is changing, not ending. Here, we discuss two key trends: the rise of the Chinese multinationals and the refocus of growth in emerging China.

Rise of the Chinese multinationals

Internationalisation is the buzzword in corporate China. For some, it is a reactive and defensive move in response to the impact of rising geopolitical tension on global supply chains, inadequate domestic demand and excess capacity. However, for some aspiring entrepreneurs and companies, internationalisation is a natural evolution from domestic dominance to global prominence.

Export and global growth are not new, nor are they the same as that of yesteryear when iPhones and Nike shoes were made with cheap and efficient labour. This new phase of internationalisation is different, it is the export of knowhow, technology, innovation and brands. From ‘made in China’ to ‘branded and marketed by China’, we will see the rise of Chinese multinationals.

Chinese EVs are coming to a place near you

Commenting on its Chinese competitors, Tesla’s CEO Elon Musk said on the company’s most recent earnings call: "If there are no trade barriers established, they will pretty much demolish most other car companies in the world. They're extremely good." We could not agree more. In fact, that is already happening. With its technology, scale and production leadership in electric vehicles (EVs) and a more successful go-to-market strategy, China’s car exports overtook Germany and Japan in extraordinary fashion in just two years.

Auto exports (individual units)
Auto Exports (Individual Units)
Source: CEIC; The Lowy Institute; August 2023.

A substantial part of this success is rooted in their competitiveness and popularity in other emerging markets, in south-east Asia, the Middle East and Latin America. In an increasingly multipolar world, this trend of rising Chinese multinational brands in the global south is very likely to continue. While it will take more time and effort to win the hearts and wallets of richer and pickier European consumers, we do believe Chinese car makers have a compelling value proposition for a world fast transitioning towards EVs. The winning formula of better and cheaper will prevail.

However, it is not just about selling cars globally, it is more about globalising the supply chain. Chinese brands are also making their supply chains international, bringing their best partners with them. Hongfa, the world's largest relay manufacturer with dominant market share in high voltage DC relays for EVs, after building a thriving Indonesia production base servicing its global clients, is constructing its first European production site in Germany. Developing local supply chains in Europe is also necessary and critical to managing rising trade barriers and tension.

Your margin is my opportunity – should Amazon be afraid?

While it will take time for Chinese EVs to conquer Western consumers, Chinese digital consumer platforms are already making significant inroads. Temu, Pinduoduo’s international e-commerce superstore, and Shein, a global e-commerce fashion retailer, both boasting more than 150 million monthly active international users and $30-$40bn annualised gross transaction sales, are already very popular with both US and European consumers, especially with younger digital natives.


In the case of Temu, with same or similar private label products selling at a 30-40% discount to Amazon, many consumers are willing to trade convenience and wait for up to two weeks for delivery, especially in the current cost of living crisis. It was Jeff Bezos who famously said to the offline retailers that “your margin is my opportunity.” On 5 December last year, Amazon reduced its seller fee in what we consider an attempt to make Amazon more competitive against fast growing new entrants such as these two. The jury is still out; with Temu’s efforts to build more logistics and warehousing infrastructure to shorten fulfilment times and enhance user engagement, it is possible that these emerging e-commerce platforms will challenge Amazon’s global dominance in internet retailing.

The ubiquitous three and the convergence of two Chinas

What struck us most when visiting many small towns is the ‘ubiquitous three’ that seem to be everywhere. Luckin Coffee brings tolerable $1.50 per cup coffee to the masses; Tastien Chinese Burger localises Western fast food at lower price points; Mixue peddles sub-$1 fruity and creamy tea drinks on an industrial scale. Looking at the ubiquitous three, it is sometimes hard to reconcile them with the narrative of weak consumption.

Luckin CoffeeTastien Chinese BurgerMixue

The answer lies in the convergence of the two Chinas. The Polar Capital China Stars team has long argued that there are two very different Chinas: a developed China with about 200 million truly middle-class consumers clustering around four megacities – this is the China that everyone was visiting and focusing on – and another emerging China of wet markets, cheap knockoffs and unbranded consumer goods.

Instead of the Shanghai middle class drinking more Starbucks or pricy artisanal coffee, the main consumption story is now for the other hundreds of millions of lower/middle-income families trying decent coffee and burgers for the first time and more often at affordable prices.

Quality, internationalisation and emerging consumers

After decades of urbanisation and investment-led explosive growth, China’s growth has slowed but it is far from over. Rather, the growth drivers are transitioning. Looking ahead, the China growth story is different and investors must adapt to capture growth and alpha opportunities. The Polar Capital China Stars Fund is focusing on three trends to capture attractive opportunities, investing in:

  • Best of breed companies. After three years of derating, the highest quality China assets are on very attractive valuations. We focus on the best brands, best management teams and best businesses. Picking the best and forgetting the rest is a luxury investors can enjoy now.
  • High potential Chinese multinationals. The rise of Chinese multinationals will be a key growth theme in the next five years as the best and brightest of corporate China pursue their global ambitions. The Fund positions itself to benefit from the growth of Chinese brands and supply chains in the global south and beyond.
  • The levelling up of emerging consumers. The growth of Starbucks, Louis Vuitton bags, cognacs and Cartier jewellery will continue, but the most interesting consumption story may shift to the boring and unsexy small towns with unrecognisable names. It is most likely to be the local brands with the best execution and relentless focus on detail that are best positioned to capitalise.

Through investing in the best of breed companies with high returns and solid balance sheets, emerging Chinese multinationals with convincing and exciting international expansion opportunities, and strong local brands with high growth potential in lower tier cities, the Polar Capital China Stars Fund is very well positioned to capture significant upside when China emerges from the current downturn.