Profitability Gap Between China’s New and Old Economies Widening
In China, a Consumer-Led Economy Takes Charge

China's transition from an investment-led to a consumer-based economy has been underway for years, but the contrast of company profitability (profitability gap) between these sectors has never been clearer. The return on equity (ROE) – a measure of net income relative to shareholders' equity – of companies in the growing consumer, technology and health care sectors was 18.2 in December 2016. This is in sharp contrast to energy, materials and industrial companies, which since 2011 have had a declining ROE that recently reached 5.3 – an all-time low. Investors should be mindful of this shift and seek exposure to companies that take advantage of the tastes of millennial consumers and a growing middle class.