China Opportunity
Although Covenant is not a private equity firm in the traditional sense, emergent trends in private equity investment in China indicate there is increasing demand for growth capital in China in light of the Chinese government's economic initiatives and the country's rapidly expanding consumer base. Private equity investment in China will boom in the next few years. Specifically, it is predicted that China should experience a 30% rise in such investment during the 2009-2011 period (China's Private Equity Boom, by Shaun Rein, Business Week, July 16, 2008). In 2005 investors allocated $5.0 billion to China and in 2008, $20.5 billion was invested. This surge, according to Business Week, is supported by four pillars: the growth of the Chinese middle class; the global competitiveness of Chinese firms; the tightening of credit for smaller Chinese firms; and the Chinese stock market. In spite of the global economic uncertainty during 2009, during the first half of the year private equity commitments of $7.2 billion were made in China and the growth trend of this activity was strongly positive. Nevertheless, the success of our business will primarily be characterized by the investment opportunity that China presents and the positioning of our portfolio companies to capitalize on such opportunities within their respective industries.
The underlying power of the Chinese economic engine is characterized by the country's growth in 2009. GDP grew by 8.7%, consumer spending rose by 15.1% and fixed asset investment grew by 33.4%.
Perhaps the most striking and powerful aspect of Chinese economic activity is the growth of the middle class and the impact that the consumer behavior of this middle class is bringing to the economy. The Chinese middle class has already reached at least 250 million people and is expected to be in excess of 600 million by 2015. We expect this growth in the middle class and the potency of its consumer behavior to become a theme for some of our investment activities.
As part of the growth of the middle class China has also witnessed a stunning transition of its population from rural areas to urban areas. Today the urban population of China is approximately 585 million and it is expected to grow by over 300 million within 15 years. There are 51 cities in China with a population over 1 million, in the U.S. there are only 9. This trend will generate growing demand for infrastructure, social services, transportation systems, environmental and pollution control as well as demand for consumer products and services ranging from household appliances to entertainment.
Connecting these large urban centers and assuring the rapid and efficient movement of manufactured goods between cities and food and produce into the cities has resulted in an unprecedented level of investment in transportation infrastructure. These investments dwarf those made in the development of the U.S. interstate highway system in the 1950's & 60's. This development of the transportation infrastructure includes 5 main north-south super highways and 4 main east-west superhighways and will result in there being 85,000 km of highways in China by the end of 2010, 12% more than in the U.S. Rail projects include plans for 280 bullet trains connecting major population centers. Additionally, China's domestic production of cars and trucks exceeded the U.S. production in 2009 and is expected to reach 15 million units per year by 2012.
The Chinese economy is rapidly and fundamentally transforming itself and the country under the guidance and through the policies of the Chinese Communist Party and the central government. Their policies are in pursuit of long-term goals and are not reoriented or refocused in response to short-term issues. The policies themselves are based on the principle of having a "harmonious society" through developing the health and wealth of the people through "market socialism" with policies to assure market stability and economic growth.
