Private equity firms think the economy will rely less on exports and depend more on domestic demand for growth Mainland companies catering to the country's growing appetite for consumer goods - everything from refrigerators to spirits - are attracting a growing share of the inflow of private equity capital as investors bet the economy will become less reliant on exports and more dependent on domestic demand. The expanding number of middle-class consumers, especially in eastern coastal cities, provides a ready market for the growing legion of small private companies catering to their needs. And these outfits, unlike the state-owned enterprises that once dominated the economy, are much more eager to accept foreign equity ownership on terms - such as board seats - that foreign investors demand. In the sort of transaction that is becoming more common, the 3i of Britain yesterday said it bought baby and household products maker Mayborn Group for GBP137 million ($1.97 billion) with plans to start marketing its products to Chinese consumers. The company has until now manufactured its products in China but sold them mostly in Europe. 'We see this as one of the big growth areas. As consumers get more sophisticated and have more money to spend, they'll start spending it on different products for their families and homes,' said Jamie Paton, head of North Asia at 3i. The firm earlier this year led a US$51 million investment round in PCD Stores, a mainland department store chain. Consumer-related investments have accounted for 73 per cent of private equity investments in China this year, up from 19 per cent last year, data from the Centre for Asia Private Equity Research shows. The size of individual investments is also growing, as shown by Warburg Pincus' purchase of a US$150 million stake in electronics retailer Gome this year. Private equity firms manage money from wealthy individuals and institutions and use it to buy non-listed stakes in companies. 'There's high sustained growth in [gross domestic product] and per-capita disposable income, which gives the consumer the mentality and the willingness to spend as their income increases,' said Brandon Lin, a partner at private equity firm Saif Partners. Saif focuses on consumer sectors such as television direct sales, property agency networks, internet social networks, online games, digital video recorders and online education. Last year, it made a US$30 million bet on Sun Co, the largest property agency network in the mainland and it has also invested in the Chinese unit of TiVo, the digital television recorder company. 'In any fast-growing market, a lot of these companies are relatively small, so it gives us private equity guys, especially in the growth capital stage, an opportunity to invest in companies that are making US$5 million in earnings and aren't ready to go public yet,' Mr Lin said. Darby, the private equity and mezzanine finance arm of fund giant Franklin Templeton Investments, is also focusing on medium-sized companies in the consumer manufacturing and retailing area. 'The overall macroeconomic situation in China and India is expanding rapidly,' said Simon Sham, managing director of Darby's Asian operations. 'Domestic income levels are rising and the size of the middle class is growing. They're relying less on exports for their growth.' Boosting domestic demand - and presumably along with it, imports - is a key element of the government's economic strategy and in time should help ease the pressure Beijing faces from its trading partners to revalue the yuan. Moreover, there is a limit to how much more market share China can gain in world manufacturing, meaning it must follow more developed Asian economies such as Japan and South Korea in boosting domestic consumption. 'The decision to begin revaluing the currency was a major signal of wanting to boost domestic demand and maybe being willing to sacrifice some of the growth rate on the export side,' said Jonathan Garner, a Credit Suisse analyst. Credit Suisse said Chinese household consumption spending accounted for 3.8 per cent of the global total last year, from 2.9 per cent in 2004. The bank expects China, the seventh-largest household consumer market, to overtake Italy this year and France next. Double-digit growth in real disposable income, particularly among consumers earning more than 10,000 yuan a month, is creating demand for a wide range of products, including fast food, alcohol, cosmetics and electronics. 'The top end of the [income] distribution is becoming a large market very quickly and therefore in certain areas, such as fast food, we found between two surveys in December 2004 and 2005 that there was a 25 per cent increase in market size in 15 months,' Mr Garner said.
