Thoughts

FromtheRoad

CHINA|April2024

IrecentlytraveledtoChinatovisitwithCEOs,

policymakers,andKKRdealteams.IalsospentlotsoftimewithmyteammatesChangchun

Hua,whoservesasChiefEconomistforGreaterChina,andAllenLiu.Seebelowforthedetails,butourconclusionsfromthismostrecentvisitareasfollows:

1.China’seconomyhasbottomed.Thisvisitwasmyfourthinthepastfivequarters,butthistimefeltdifferent.Easieryear-over-yearcomparisonscertainlyhelp,butsomeofthe‘scarringeffect’fromCOVIDisdissipatingtoo.That’sanimportantdevelopment.Atthesametime,though,ourconversationswithlogisticscompanyexecutives

suggestedthattheU.S.consumerisrebounding,helpinglocalgoodsexportersaswell.Finally,Chinaisnowalsobenefittingfromagreaternumberofcountriestransacting

morefrequentlyinrenminbithesedaysversusbeforeCOVID.

2.Maybemoreimportantly,tradewithinAsia,whichweviewasamegatheme,

continuestogainmomentum.Alltold,AsiaisbecomingmoreAsiacentricastradewithintheregionrises:In1990,just46%ofAsiantradetookplacewithinAsia,but

HenryH.McVey

HeadofGlobalMacro

&AssetAllocation,

CIOKKRBalanceSheet

henry.mcvey@

ChangchunHua

ChiefEconomistfor

GreaterChina

changchun.hua@

AllenLiu

allen.liu@

ThoughtsFromtheRoad|China|April20242

by2021,thatfigurehadreached58%.Weseethis

percentageincreasinganother10%overthecoming

years.Importantly,therearegrowingcountryrivalriesembeddedinthisgrowthforecast,but–todate–Chinahasgainedsharenotonlythroughitscompetitive

exports,butalsobycreatingamorelocalpresence

inkeymarketssuchasVietnam.Forglobalinvestors,

bothAsiainfrastructureandAsiaCredit(bothliquidandprivatemarkets)areeffectivewaystoplaythisthemeacrosstheregion,webelieve.

3.TherebalancingoftheChineseeconomytowards

automationandtheenvironmentisdefinitelygood

forGDPgrowth,butwearenotsurethatitisasgoodforglobalallocators.TheNewEconomyinChina,whichwedefinetoincludetheGreenEconomy,AI,andthe

industrialautomation/digitalizationeffort,represents

about20%oftheeconomy,butaccountsfor55%of

GDPgrowth,webelieve.OnecanseethisinExhibit1.

MycolleaguesFrancesLim,ChangchunHua,andIwroteaboutthisextensivelyduringourlasttrip(seeThoughtsfromtheRoad:AsiadatedOctober2023).ToChina’s

credit,thecountrypivotedearlyandhardtothese

threedynamicsectors.That’sthegoodnews.Thebadnewsisthatthereisalotofcapacityinthisarea,the

costcurveisbendingsharply,andweareincreasinglyworriedthat–leftunchecked–excesscapacityand

competitioncouldleadtosignificantmarginpressure

forthecompaniesthataredeliveringonthese

importantstrategicmandates.Thesesectorsarealsoincreasinglyviewedasstrategictonationalinterests,

potentiallymakingthemsubjecttoexportcontrols,

marketaccessrestrictions,limitsonjointventureswithforeignfirms,andinvestmentrestrictions.Asaresult,investorsmustunderstandandbeattentivetoboththeopportunitiesandrisksassociatedwiththeseareasofgrowth.

TherewasalotofdiscussionaboutthetrajectoryofGDPgrowth,butmoreandmorethediscussionisnowcenteredonthecapitalmarkets,includingbothflowsandsavings.

Exhibit1:AMisunderstoodEconomy:DigitalandGreenTransformationShouldOffsetOngoingDragsFromRealEstateIn2024

ChinaGDPBreakdown:2024

0.7

0.4

1.7

4.7

-1.4

3.3

DigitalizationGreenTransition

Catering&Accom.,

Other

RealEstate&Scarring

Total

Wholesale,etc.

Note:‘Greentransition’isbasedongreenfinanceandtransition

investmentstudiesfromtheBeijingInstituteofFinanceand

SustainabilityaswellasreportedbyBNEF.‘Digitaleconomy’

addedvalueisasreportedbyCAICT,includingaddedvalueoftheinformationindustryandaddedvaluethattheinformationindustrybringstootherindustries.Thedragofrealestateisestimated

bytheKKRGMAAteamwithanIOtableandincludesthereal

estateindustryitselfandtheindustry’simpactonupstreamand

downstream.DataasatMarch25,2024.Source:BeijingInstituteofFinanceandSustainability.ChinaNationalBureauofStatistics,BNEF,CAICT,KKRGlobalMacro&AssetAllocationanalysis.

Exhibit2:TheOngoingChangeinChina’sEconomyWillContinuein2025.KeyVariablesIncludeLessDragFromRealEstateandConsumerConfidence

ChinaGDPBreakdown:2025

0.5

4.5

0.6

1.3

-0.7

2.8

DigitalizationGreenTransition

Catering&Accom.,

Other

RealEstate&Scarring

Total

Wholesale,etc.

Note:‘Greentransition’isbasedongreenfinanceandtransition

investmentstudiesfromtheBeijingInstituteofFinanceand

SustainabilityaswellasreportedbyBNEF.‘Digitaleconomy’

addedvalueisasreportedbyCAICT,includingaddedvalueoftheinformationindustryandaddedvaluethattheinformationindustrybringstootherindustries.Thedragofrealestateisestimated

bytheKKRGMAAteamwithanIOtableandincludesthereal

estateindustryitselfandtheindustry’simpactonupstreamand

downstream.DataasatMarch25,2024.Source:BeijingInstituteofFinanceandSustainability.ChinaNationalBureauofStatistics,BNEF,CAICT,KKRGlobalMacro&AssetAllocationanalysis.

ThoughtsFromtheRoad|China|April20243

4.Themostimportanttakeawayfrommytrip,though,isthatnosustainable,structuralaccelerationin

China’sGDPgrowthislikelyuntiltwothingsoccur.

First,afundamentallyoverbuiltrealestateindustry

needstobeaddressed–andquickly.Nodoubt,

therearelotsofcomplications,includingtoomany

developers,uncertaintyaroundaccountability,and

excesscapacityinnon-ideallocations.Aswediscuss

inmuchgreaterdetailbelow,ourhistoricalanalysisof

housingcorrectionsshowsthatbothpriceandvolumemustcomeunderpressuretofinishthecleansingcycle.Todate,though,ithaslargelybeenacontractionin

volume.Moreover,ifwecomparehousingbustslike

thoseinSpainandtheU.S.toJapan(thelatterofwhichdraggedoutwaytoolong),speedandboldnessof

policyusuallywintheday.Second,confidencemust

berestoredtodrivesavingsbackdowntoinspire

bothconsumersandcorporationstospendonhigherqualityupgradesflaggedbytheChinesegovernment

asopportunitiesintheconsumerandindustrialsectors.Onerelevantmeasureofrisk-takingsentiment,we

believe,isthatsavingsasapercentageofhousehold

incomehastickeduptoanaverageof32.5%,comparedto29.1%beforeCOVID.Werethistoreturntopriorlevels,itcouldaddroughly$200billionormoreofspending

eachyear,webelieve.Withoutquestion,oursuggestionwouldbenottoover-stimulate(whichthegovernmenthascorrectlysignaleditdoesnotwanttodo),but

rathertousemoreaggressivesupply-sidereforms,

includinggreaterurbanizationincentives,lessredtapeforentrepreneurial/businessefforts,moresupportformigrantworkersincities(e.g.,grantinghukoustatus

whichprovidesaccesstothesocialwelfarenetwork),andimprovedclarityaroundhousingmarketreform/support.Seebelowforfurtherdetails.

5.ThereareabouttobesomeimportantchangesintheChinesefinancialservicessystemasratesfallfurther,webelieve.Ifshortratesfalltoonepercentfrom1.8%aswebelievemayhappenontheheelsofcontinued

lowinflationprintsagainin2025(andwearemore

focusedoncorethanheadline),thendomesticfinancialintermediaries,includingbanksandinsurers,willlikelyneedtoshifttheirportfoliostoincludehigheryieldingaswellashighertotalreturnvehiclestooffsetthepinchinnetinterestmarginthatweforesee.Biggerpicture,

thereislikelyasizeableopportunitytomodernize

thesavingssysteminChinaviaupgradingthelocal

assetmanagementindustry,especiallyifwearerightaboutlowratespersisting.Indeed,iftherearelessonslearnedfromQuantitativeEasingintheU.S.,Europe,

andJapan,itisthatlowratesnotonlystealfromsaverstopotentiallyimproveeconomicgrowth,butalsothattheyadverselyaffecttheoperationalcapabilitiesandprofitabilityoftraditionalfinancialintermediariesalongtheway.

6.TherewasalotofdiscussionaboutthetrajectoryofGDPgrowth,butmoreandmorethediscussionis

nowcenteredonthecapitalmarkets,includingbothflowsandsavings.WhetherChinagrowsfourorfive

percentinthenextfewyearsisreallynotthemost

importantnarrativeforinvestors,webelieve,asChinaisalreadyoneofthelargestandfastestgrowingmatureeconomies.Rather,wethinkwhatmattersmostatthisjunctureiswhetherthecountrydevelopsacoherent

strategytoloweritscostofcapital,thusallowing

Chinatobemorecompetitiveontheglobalstageas

befittingthesizeandbreadthofitseconomy.Aneasywaytoachievethis,accordingtolocalswithwhom

wespoke,couldbetofocusonthehealthofthelocal

A-sharemarket,includingincreasingconsistentaccesstopublicmarketsfordomesticconsumerandservicescompaniesthroughIPOs,aswellasloweringrestraintsonforeigninvestorsowningstakesinexistingpublic

companies(manyofwhicharequiteattractivelypriced).Duringourvisitwemetwithexecutivesfromhigh

qualitycompaniesthat1)catertoconsumerupgradesandservices;2)havesolidreturnsoninvestment;

and3)arevaluedatattractivelevels,especiallyfromarelativeglobalvalueperspective.Rightnow,however,thesecompaniesareeitherstayingprivateforlonger

orlistingontheHongKongexchange.Werethese

companiestogopublic,theywouldextendthebreadthofthepublicmarketsandmakethemmorecompetitivewithotherleadingdevelopinganddevelopedmarkets(seebelowfordetails).

ThoughtsFromtheRoad|China|April20244

Exhibit3:StrongEconomicGrowthHasNotTranslatedintoStrongGainsinChina’sEquityMarket

GDPGrowthvs.EquityMarketPerformancebyCountry,5-YearCAGR,%

NominalGDPEquityMarketTotalReturn

15%15%

8%

7%

6%

4%

3%

2%

U.S.GermanyJapanChina

Datainlocalcurrencyterms.Equitymarkettotalreturnbasedon

trailing5years.U.S.referstoS&P500,ChinareferstoSHCOMPandGermany/JapanrefertoMSCIIndices.DataasatMarch26,2024.

Source:Bloomberg.

Exhibit4:BecauseofChina’sHousingWoes,Its

LargeRepresentationofFinancialsHasImpactedthePerformanceofItsStockMarket

Financialsas%ofTotalEquityMarketCap

30%

25%

20%

15%

10%

5%

0%

23%

13%

13%

U.S.

China

Japan

Note:U.S.referstoS&P500,JapanreferstoMSCIJapanandChinareferstoShanghaiCompositeIndex(SHCOMP).DataasatMarch26,2024.Source:Bloomberg.

Lookingatthebigpicture,theChinastoryremainsa

complexone.Stronggrowthinrecentyearshasnot

translatedintostrongstockmarketperformance,andtheeconomyisstillundergoingafundamentalrepositioning

thatmaynotbefullyappreciated.Moreover,current

geopoliticaltensionswilllikelybeamplifiedinthecomingmonthsaheadoftheU.S.presidentialelection.Importantly,though,foranyonewhotakesaglobalperspectiveon

assetallocation,thesegeopoliticaltensionscouldlikelybemorestructuralthancyclicalinnature.

Notsurprisingly,againstthisbackdrop,manyinvestors

withwhomwespeakhaveexpresseduncertaintyon

Chinaasaninvestmentdestination.Infact,accordingtosomeofourproprietarysurveywork,manyallocators

haveconsideredreducingChinaexposureto5-6%,downfrom10-12%todayatatimethatwethinkfundamentalsintheeconomyarelikelybottoming.

Reflectingonthecurrentset-upinChina’scapitalmarkets(ofpotentiallyimprovingfundamentalsatatimeof

significantinvestorcaution),wethinkthatthepossibilityforinvestorstogetwhipsawedisincreasing.InpastinstanceswhereIhaveseensentimentsonegativeatatimewhen

thesupply/demandimbalanceofflowscouldreverse,

ongoingstretchesofpoorequityperformanceactuallyendupbecomingimportantcatalystsforchange.Specifically,itusuallyhasledCEOsandpolicymakers-facingasurgeintheircostofcapitalrelativetoothersectorsorother

partsoftheworld-tostartimplementingprogramsthatfocusedmoreheavilyonreturnoncapital.Asaresult,bothforeignanddomesticflowstypicallycamebackintothe

sectorormarket-oftentothesurpriseofthosewhohadrecentlytrimmedtheirpositions.

Whatcouldshiftinthedomesticeconomythatmight

serveasacatalystforchangeininvestorsentiment?WeleftBeijingthinkingthatongoingmandatestoimprove

thequalityofChina’shousingofferingaswellasenhanceitsindustrialofferingwon’toccurwithoutamorevisiblehandfromthegovernmentasitrelatestothedomesticrealestatemarket.Werethistooccur,however,itcouldmateriallyshiftinvestorperception.Second,aswealsodiscussbelow,therearepotentiallybillionsofdollars

ofsupplysidereforms,includingfasterurbanization,

expansivemigratoryreform,andincreasedcorporate

privatizationstrategies,thatcouldnotonlyboostgrowthbutalsoimproveinvestorsentiment,includingloweringthecountry’scostofcapital.

So,whileourmessageisnotanall-clearsignaltoleanin,itisareminder–usinghistoryasourguide–that,ifChinadoesadjustitsdomesticpoliciestobemoreinvestor

friendly(especiallyasitrelatestosupplysidereforms),thismarketcouldreboundsignificantlyfromcurrentlevels.

ThoughtsFromtheRoad|China|April20245

Details:What

didIlearn

duringmyvisit?

WeleftBeijingthinkingthattheeconomyinChinaisfinallygettingabitbetter,onacyclicalbasis.Easycomparisonscertainlymatter,buttheasynchronousnatureofthe

currentglobalrecoveryisstartingtofeelatleastalittle

moresynchronizedthaninpriortrips.Forexample,as

mentionedearlier,severallogisticscompaniessuggestedthatdemandfromtheU.S.ispickingbackup.However,

therealstructuralstoryonwhichtofocus,inourview,

remainstheaccelerationinintra-Asiatrade.Aswenotedabove,AsiaisbecomingmoreAsiacentricastradewithintheregionrises–in1990,just46%ofAsiantradetook

placewithinAsia,butby2021,thatfigurehadreached58%.Ourestimateisthatthisratioincreasesanother10%inthecomingyears,whichwouldputChinaanditspeersintheregionmuchmoreinlinewithEuropeandNorthAmerica.

Exhibit5:In1990Just46%ofAsianTradeTookPlaceWithinAsia;By2021,ThatFigureHadReached58%

%ofTradeWithinAsia

58%

46%

2021

1990

ASEAN5equalsIndonesia,Malaysia,Philippines,Singapore,andThailand.DataasatSeptember2023.Source:TheEconomist.

Intermsofwhatisworking,thegrowthofagreener

economyremainsrobust.Thoughitisonly10%ofChina’sGDP,weestimatethissegmentisgrowingaround20%year-over-year.AtthemanufacturinglevelinChina,therearethreeareasoffocusarounddecarbonization.First,

thereistheintentiontoreducethecarbonfootprintof

manufacturing.Asoneexample,therecyclingofkeyinputssuchascobaltisseenascritical.Second,thereisafocus

onthetransportationofgoods,withagreateremphasisontheefficiencyofonboardingandlogistics(includingtangiblestoriesaboutcompaniesusingAItoimprove

optimizations).Finally,thereiselectricity,withrenewableenergycapacityalreadyreaching1.45billionkilowattsin2023,accountingformorethan50%ofthetotalinstalledpowergenerationcapacity.

Thereisalsoahugefocuson‘upgrading’,especiallyasit

relatestoChina’sindustrialfootprint,butalsothehousingmarket.Ontheindustrialfront,Chinanowboastsover50%marketshareintheinstalledglobalrobotindustryandhasreportedhaving10,000provincial-leveldigitalworkshopsand5,600national-levelgreenfactories.Saidanotherway,highquality,loweremissions,andbettertechnologyare

allafocus.Utilizingultra-long-termgovernmentbonds,

Chinaislaunchinganequipmentreplacementandupgradescheme(RMB5trillionor$700billionplusperyear),

mostlyfocusingonenergyefficiency,automation,anddigitaltransformation.

Exportsarealsodoingfine.Infact,despiterisingtariffs

andgeopoliticaltensions,Chinaisstillaglobalmarket

sharewinner(Exhibit6).Thecountryhasbothshifteditsproductmixaswellasitscustomerbase.Importantly,

though,thesenumbersdonotincludeoutputincountrieslikeVietnamandMexico,whereChinaisincreasingly

viewedasa‘local’manufacturer.

Tobesure,though,weareoptimistic

lesssobecausewethinkthatGDP

growthisgoingtosnapbackquickly.

Rather,asourtripconfirmed,thereisaplaybooktobothbuildonexisting

strengthsaswellastotweakpoliciestocreatemorestability,especiallyasit

relatestoRealEstateandconsumerconfidence.

ThoughtsFromtheRoad|China|April20246

Exhibit6:ChinaHasaSizeableGlobalMarketShareinExports,DespiteHeadwindstoGlobalization

ShareofWorldExports,12-MonthMovingAverage,%

U.S.IndiaASEANChina

Nov-23

14.5%

16

14

12

10

8

6

4

2

0

808590950005101520

DataasatNovember30,2023.Source:IMF,HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

IntermsofwhatisstillburdensometotheChinese

economy,threethingsagainbubbledtothesurfaceduringourvisit.FirstisRealEstate,whichcontinuestobean

ongoingissue.Typically,housingcorrectionsreachafloorwhenbothpriceandvolumecollapse.However,thusfar,muchofthecorrectioninChinahascenteredonvolume.

Onedevelopertoldusthatnotonlyistheproblemstill

big,butitisalsocomplicatedashousingliabilitiesextend

acrosstheprivateandpublicsectorsaswellasacrosslocalandcentralgovernmentlevels.Thus,thereisnoquickfix.

Aspartofourworkinthisarea,Iaskedmycolleagues

ChangchunHuaandAllenLiutocomparepriorhousing

correctionstotheonecurrentlyhappeninginChina.Theirpunchlinewasthatthehousingmarketcorrectionmaybejusthalfwaycomplete.Borrowingothercountries’lessonsfollowinghousingrelatedbubblebursts,wenotethe

following:

.Housingstarts:Clearly,inChina,thesharpdecline

indevelopers’confidencehastriggeredatumblein

housingstarts,whichhavefallenbyalmost60%fromtheirpeak.OnecanseethisinExhibit7.China’scurrentdrop-offcomparesto-73%correctionintheU.S.and-95%correctioninSpainduringthefirstthreetofiveyearsafterthebubbleburst.Japan’shousingstarts

correctionhappenedinamoregradualandpersistentmanner.

.Housinginvestment:AsweshowinExhibit9,China’shousinginvestmenthasfallen25%fromthepeak,

versus-56%intheU.S.and-68%inSpainoverthesameperiod.InJapan,bycomparison,thedeclinehappenedpersistentlyoverthepastthreedecades.This‘slow

burn’speakstotheadverseimpactofnotmoving

quicklytowrite-offassetswithinthebankingsystemaswellastotheimportanceofastrongmonetary

responseaimedatimprovingconfidence.

.Housingprices:Despitethesignificantdeclineinlevelsofactivity,China’shousingpriceshavebarelycorrectedinabsoluteterms.Wethinkthismaybepartlyrelatedtostatisticalissuesandpartlytoregulatoryrestrictionsonthesettingofhousingpricesaswellashouseholds’understandableunwillingnesstosellata‘low’price.

Againstthisbackdrop(andifhistoryisanyguideasperExhibit8,wethinkitislikelythatweseefurthercorrectionpressuresdowntheroad.

.Housinginventory:Bytheendof2023,Chinahad

builtahugeinventoryofhousing,perhapsinthe

neighborhoodofnearly25millionunits,including

threemillioncompletedand22millionunitsofforwardhousingtobedelivered.OnecanseethisinExhibit

10.Andrememberthathouseholdformationisonly6-8millionperyear.Thissizeablemismatch,we

believe,meansthat,unlessthereismoregovernment

interventiontoupgradequalityand/orwriteoffassets,itwilltakeconsiderabletimetodigesttheinventories.

Aspartofourworkinthisarea,IaskedmycolleaguesChangchunHuaand

AllenLiutocomparepriorhousing

correctionstotheonecurrently

happeninginChina.Theirpunchline

wasthatthehousingmarketcorrectionmaybejusthalfwaycomplete.

T-15

T-13

T-11

T-9

T-7

T-5

T-3

T-1

T+1

T+3

T+5

T+7

T+9

T+11

T+13

T+15

T+17

T+19

T-15

T-13

T-11

T-9

T-7

T-5

T-3

T-1

T+1

T+3

T+5

T+7

T+9

T+11

T+13

T+15

T+17

T+19

100

90

80

70

60

50

40

30

20

10

ES:

-59%

-73%

-95%

ThoughtsFromtheRoad|China|April20247

Exhibit7:HousingStartsCorrectionComparisonsSuggestChinaHasTakenaLotofPain…

HousingStarts

JapanhousingstartsT=1990ChinahousingstartsT=2019UShousingstartsT=2005SpainhousingstartsT=2006

JP:

US:

0

DataasatDecember31,2023.Source:JapanMinistryofLand,

InfrastructureandTransport,ChinaNationalBureauofStatistics,

FederalHousingFinanceAgency,CensusBureau,SpanishStatisticalOffice,HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

Exhibit8:…ButThereIsMoreWorktoBeDoneonPrice

Housing/LandPrices

JapanlandpriceT=1991ChinaexistinghomepriceT=2021UShousingpriceT=2006SpainhousingpriceT=2007

US:-20%

100

95

90

85

80

75

ES:-36%

70

65

60

55

50

DataasatDecember31,2023.Source:JapanMinistryofLand,

InfrastructureandTransport,ChinaNationalBureauofStatistics,

FederalHousingFinanceAgency,CensusBureau,SpanishStatisticalOffice,HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

Exhibit9:OurHopeIsThatChinaDoesNotFollowJapan’sSluggishApproachtoFixingHousingas…

HousingInvestment

JapanprivatehousinginvestmentT=1996ChinahousinginvestmentT=2021

SpainhousinginvestmentT=2007

UShousinginvestmentT=2005

100

90

80

70

60

50

40

30

20

10

0

T-15

T-13

T-11

T-9

T-7

T-5

T-3

T-1

T+1

T+3

T+5

T+7

T+9

T+11

T+13

T+15

T+17

T+19

CN:-25%

JP:-48%

US:-56%

ES:-68%

DataasatDecember31,2023.Source:JapanMinistryofLand,

InfrastructureandTransport,ChinaNationalBureauofStatistics,

FederalHousingFinanceAgency,CensusBureau,SpanishStatisticalOffice,HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

Exhibit10:….TodayThereCouldStillBeNearly30MillionExcessHousingUnitsinChina

AccumulativeGapofHouseholdsNewFormationandNetNewStartsInUrbanAreas

8

6

4

2

0

-2

-4

-6

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Gapbetweennewlyaddedhousesandhouseholdformation(mn)

CumulativeGap(mn,rhs)

40

30

20

10

0

-10

-20

-30

DataasatDecember31,2023.Source:HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

ThoughtsFromtheRoad|China|April20248

Second,muchofthequalityupgradethesisweheardaboutasitrelatestohousing,whitegoods,consumertransportation,etc.,ispredicatedonareboundin

consumption.However,savingsratescontinuerising,

areflectionthatthereisstillarealneedforimproved

confidencebeforethisupgradecyclecanbecomemoreself-sustaining,webelieve.Asaresultofthescarring

effectfromthepandemic,includingapostponementofconsumerupgradesandlargeexpenditures,aswellasanuptickintheyouthunemploymentrate,consumerconfidencefellsharplyoverthepastthreeyears.Thisrealityledtoexcesssavingssoaringto15%of2023retail

sales.However,wereconsumerconfidencetorecoverandsavingstoreturntopre-COVIDlevelsofaround29%fromitscurrentlevelofalmost33%,ChangchunestimatesthatitcouldaddRMB7trillion(ornearlyonetrillionU.S.dollars)totheeconomyoverathree-to-five-yearperiod.

Exhibit11:AmidTumblingConsumerConfidence,China’sExcessSavingsSoaredto15%ofConsumption

China'sConsumerCon?dencevs.ExcessSaving

AccumulatedExcessSaving(RMBbn)

ConsumerCon?denceIndex(RHS)

Dec-23:RMB7.2tn

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

-1,000

excesssavingor15%

of2023retailsales

130

120

110

100

90

80

2015-12

2016-06

2016-12

2017-06

2017-12

2018-06

2018-12

2019-06

2019-12

2020-06

2020-12

2021-06

2021-12

2022-06

2022-12

2023-06

2023-12

DataasatDecember31,2023.Source:ChinaNationalBureauofStatistics,HaverAnalytics,KKRGlobalMacro&AssetAllocationanalysis.

Thereis,however,goodnewsontwo-fronts

consumption-wise.Wenotethefollowing:

.Urbanizationisstillat66%,whichmeans,using

developedmarketpeersasaguide,thatChinastillhas10-12%moreinpotentialgains.Thistranslatesto150

millionormoreChineseconsumerswhoarepoisedtoseetheirincomesincreaseastheymovetowardsurbanhubs.Atthesametime,somelocalscholarsestimate

thataround170millionmigrantworkerswhohavebeenlivingincitieshaven’tregisteredinthehukousystem,aresidentstatusthatgrantseligibilitytoaccesstheurbansocialwelfaresystem,includingthingslikehealthcare

insurance,pension,andpubliceducation,amongothers.Theyexpectthatgrantinghukoutotheseresidents

wouldstimulateadditionalRMB1.2trillionoraround$170billioninconsumption1.

.Recentgovernmentreportsshowthatdisposable

incomeperhouseholdincreasedby6.1%in2023,

whichisslightlybetterthanoveralleconomicgrowth.WhileconspicuousconsumptionisdowninChina,

buyingbasicgoodsandservicesaswellasmodestlifestyleupgradeactivity,especiallyinthemiddleto

higherincomerange,remainssolid.Indeed,thiskindofeconomicmomentumisconsistentwithwhatwesee

inourportfoliocompanies,thelion’sshareofwhichareconsumerandservicesfocused.Toplinegrowthissolid,marginsareholding,andconsumersarespendingon

lessconspicuousitemssuchas‘smarthomes’,pets,andrecreationalactivities.Domestictravelisalsostrong.Forexample,duringtheSpringFestivalholidayinFebruary,domestictouristtripshit474million,ayear-over-yearincreaseof34%.Wealsothinkthattherecouldbemoreappetiteforhigherendconsumerstotraveloutside

Chinain2025,includingtoJapanandEurope.

Third,manylocalsfeelthatmorecanbedoneto

modernizethecapitalmarketssothatforeigncapitalfeelsmorecomfortablebothenteringandexitingthecountry.

Chin