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It’s Raining BILLIONAIRES in China! SGA Insights | February 2019
It’s Raining BILLIONAIRES in China!
SGA Insights | February 2019
It’s Raining Billionaires In China!
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It’s Raining BILLIONAIRES in China!Fifteen years ago, the world’s most populous country had no billionaires. As the Chinese economy flourished over the years, the number of billionaires grew to 373 (97% of them being self-made) with a total wealth of $1.1 trillion at the end of 2017. This growth has been spurred by excellent economic and market conditions, a population that is unprecedented in terms of size, innovations in areas such as technology and e-commerce, and China’s protectionism against global tech competitors. China has overtaken the US as the place where
exceptional wealth is created at the fastest rate. At this pace, China could eventually overtake the US as the global “billionaire hotspot.”
In 2017, 89 Chinese entrepreneurs entered the billionaire club for the first time, which was three times more than the number in the US at 30. Moreover, from 2016 to 2018, China produced 50 unicorns, slightly behind 62 in the US. Encouraged by the rapid growth of their country, the Chinese have proved to be restless innovators.
Source: UBS/PwC Billionaires 2018
Industrials
Financial Services
Health Industries
Real Estate
Technology12% (11)
1% (1)
11% (10)
13% (12)
7% (6)
Classification of 89 first time billionaires in China (by industry)
Materials25% (22)
other/diversified8% (7)
Consumer & Retail22% (20)
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Evolution of Chinese entrepreneurs
Classification of 89 first time billionaires in China (by industry)
Number of billionaires in China
1 1 0 2 2 8 16 39 28
64
114
67
123 125
211
251
318
373
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
In 2017, China’s billionaires have a high turnover; while 106 people became billionaires, 51 dropped off the list, which is indicative of the competitiveness of doing business in China.
55
Generation 1
Generation 4
Generation 3
Generation 2
>2
USD 1.12 bn
Net new billionaires, bringing the total to 373
Chinese billionaires are produced every week
Chinese billionaires’ wealth increased by 39% which is equivalent to the market capitalization of the entire Swiss Market Index
Leveraged country’s lower wages, becoming export manufacturers to the world when trade barriers were being lowered
Developing enabling technologies - in areas ranging from apps to artificial intelligence to healthcare
Built the internet platform companies for e-commerce
Invested in real estate as the cities expanded fast
Source: UBS/PwC Billionaires 2018
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Since China opened its doors to foreign trade and investment and implemented free-market reforms in 1979, it has been one of the world’s fastest-growing economies. Its real annual gross domestic product (GDP) growth averaged 9.5% through 2017, a pace described by the World Bank as “the rapid yet constant economic expansion in history.” This growth has enabled China, on average, to double its GDP every eight years and become the world’s largest economy (on a parity basis of purchasing power), manufacturer, merchandise trader, and holder of foreign exchange reserves. This has turned China into the US’s most significant commercial partner.
In Greater China, 631 Initial Public Offerings (IPOs) raised USD 52.1 billion in 2017 compared to 378 that raised USD 47.3 billion in 2016. The profits in the MSCI China Index increased by 23% in 2017. The MSCI China Index rose by 54.1% and the MSCI China A Onshore Index increased by 20.5%. In 2017, 81% of IPOs floated were on prices/earnings multiples exceeding 20 times, compared to 63% in 2016. These conditions allowed entrepreneurs to exit at high ratings and led to prosperous businesses.
According to a flagship World Bank report on the ease of doing business in various countries around the world, China worked hard in cutting red tape and oppressive regulations over the past year. China posted the third-best improvement in its ranking, securing the 46th place in 2018 from the 78th place last year, thereby getting closer to the standards of advanced economies.
A decade ago, a vast population with a burgeoning middle class drove urbanization in China. China has pulled hundreds of millions of its citizens out of poverty through rapid growth over the decade. The World Bank has classified China as an upper middle-income country. Given the increase in spending propensity and migration to the cities, entrepreneurs made their fortunes in real estate during the country’s boom. This was one of the key catalysts in wealth creation in China.
Over the last ten years, the activity switched to the technology, internet, and e-commerce. Once again, a tech-savvy population with disposable incomes played an important role. The world’s most populous country with 1.4 billion people has 788 million internet users. There has also been growth in other areas such as fintech, biotechnology, and artificial intelligence. It is no surprise that technology has caught up with real estate when it comes to wealth creation. The following three sectors accounted for over half of the billionaire wealth at the end of 2017 – Real estate (20%), Technology (19%), and Consumer & retail (13%).
Innovation is a top priority in economic planning in China. In 2015, the Chinese government announced its “Made in China 2025” plan to upgrade and modernize manufacturing in ten key sectors through extensive government support to make it a major global player. The “Made in China 2025” initiative of the country continues to drive technological innovation and improve production efficiency to revolutionize China’s image from a low-cost supplier to a high-quality producer.
The following factors have come together to create a conducive environment for enormous wealth creation in China:
1
2
3
Outstanding economic and market conditions
1.4 billion people market (18.4% of the world population)
China has a huge Research & Development (R&D) expenditure to keep itself ahead in the technology game ($257 billion in 2017)
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China’s R&D spending, which is second only to the US, has multiplied over the last 25 years as the country pursues its development strategy through scientific and technological advances. According to a National Bureau of Statistics (NBS) report, China’s R&D spending increased by an average of 20.3 % annually between 1992 and 2017, reaching $ 257 billion in 2017, about 123 times the amount in 1991. In 2017, R&D expenditure amounted to 2.12% of China’s GDP. According to the 13th five-year
plan for National Science and Technology Talent Development (2016–2020), China will increase its annual per capita spending on R&D to 500,000 yuan by 2020, up from 370,000 yuan in 2014.
In 2017, China matched America’s level of venture capital funding for start-ups, registered four times more patents related to artificial intelligence, and three times more blockchain and crypto-related patents than its US counterparts.
The Chinese government has preserved its grip on a 1.4-billion-person market protected from global competitors. The Great Firewall of the country was a boon to home-grown internet players. The control system and blockages effectively keep Facebook, Twitter, Snapchat, YouTube, Google, and others away from the world’s largest technology playground.
This has created prosperous domestic giants such as Tencent Holdings Ltd. and Alibaba Group Holding Ltd., currently two of the world’s ten most valuable companies. Alibaba’s co-founder Jack Ma and Tencent’s Chief Ma Huateng are China’s top two billionaires and among the top 20 in the world.
Out of the nearly 3,000 delegates to the Parliament, about 20% are business people. Tech companies are replacing real estate and other tycoons as political advisors, with leaders from Tencent, Baidu, and smartphone manufacturer Xiaomi Corp. among a variety of entrepreneurs who come to advise on policies. This has resulted in government policies being highly in favor of the entrepreneurial spirit of the Chinese.
The image below shows the ten key sectors that are targeted to drive the Chinese economy.
PROMOTE BREAKTHROUGHS IN 10 KEY SECTORS
4 China’s protectionism has played a vital role in creating tech billionaires
New materials
Ocean engineering equipment and high-end vessels
Aerospace equipment
Medical devices
Energy saving and new energy vehicles
Electrical equipment
Numerical control tools and robotics
Information technology
Farming machines
Railway equipment
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One might argue that billionaires in China are “smarter” risk-takers than others. Of the Chinese entrepreneurs, 97% are self-made compared to just 55% of the world’s self-made billionaires.
Being relentlessly innovative, they are forever seizing new opportunities to make their companies grow fast and become powerful. In China’s unforgiving business world, to stand still is to risk being disrupted. They transform their companies
repeatedly. For example, the country’s e-commerce giants have moved into finance, offering money market products with higher interest rates than banks.
“The Chinese culture is different from the rest of the world, especially the EU,” explained one Asian billionaire. “People in China work harder and are more willing to experiment with trials and errors while Europeans work more structurally. By the time people in the EU have come up with a structured plan, the Chinese have already developed a solution.”
5 China’s billionaires are different from the rest of the world
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The US might have the largest concentration of billionaire wealth, but China’s billionaires are a rapidly growing class of individuals. According to UBS and PwC’s annual Billionaire Insights Report, China could eventually overtake the US as the global “billionaire hotspot.”China has already overtaken the US as the place where exceptional wealth is created at the fastest rate. According to UBS/PwC, “Chinese billionaire wealth increased by 39% to $1.12 trillion in 2017 compared to 12% in the US last year.” China’s billionaires are relatively younger than the global mean, with one-third aged under 50, compared to 14% globally. The average billionaire in China is 53 years old while the average billionaire globally is aged 64.Although the current trade war or any other source of instability would slow the structural transition of China’s economy, it would be unlikely that the plans of the country’s young entrepreneurs would be halted. For young Chinese billionaires, the country’s large population and rising technology will continue to offer fertile conditions for their businesses to grow. Fluctuations in the country’s economic growth will alter its rate of progress, but continued urbanization and the increase in productivity due to technological advances will continue to provide favorable conditions to entrepreneurs for growing and monetizing their businesses.
Future Outlook
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