Once an Urbanization Play, Alibaba Stock is Now a Good Bet on Rural China

Though Alibaba Group Holding (NYSE:BABA) was founded and grounded on an industrial revolution that drew hordes of people from rural China to its major cities, most owners of Alibaba stock know the company’s future growth lies outside of those urban areas. Outlying second-tier cities and even minor villages are finally catching up with their more metropolitan peers, particularly in terms of communication.

Once an Urbanization Play, Alibaba Stock is Now a Good Bet on Rural China
Source: zhu difeng / Shutterstock.com

What’s the great irony — and potential problem — in that paradigm shift? A shrinking rural population. The China National Bureau of Statistics reported earlier this year that the country’s rural areas saw 13 million people leave for more opportunity in 2018. Many of those leaving were among the most promising income-earners that could find more rewarding employment elsewhere, taking their discretionary income with them when they left.

Now, with China’s economic growth falling to a 27-year low as of June, the already-imbalanced trickle-down upside of the nation’s new economic engine is further jeopardized. A shrinking population, particularly among working aged people, only exacerbates the concern.

It’s a paradigm that calls into question just how much growth Alibaba can truly expect to find in China’s more remote areas. It’s a paradigm that also quietly weighs on the BABA stock price, even if most owners of Alibaba stock don’t fully realize it the full scope of the brewing storm.

There’s a narrow pathway starting to appear through the distant fog, however.

China’s Big Cities Attract Rural Workers

It’s not a challenge its U.S. rival Amazon.com (NASDAQ:AMZN) ever had to contend with, though for the record, Alibaba rivals like JD.Com (NASDAQ:JD) and Baozun (NASDAQ:BZUN) are largely in the same boat.

That is, China is a huge country, and for as much work that’s been done to improve incomes outside of its biggest cities, its rural population continues to shrink after being eclipsed by metropolitan populations back in 2011. Those urbanites take their discretionary incomes with them, dragging down rural economic activity faster than redistribution efforts can boost them. The undertow takes some of the strategic shine off of Alibaba’s plans.

China’s lopsided economic revolution, however, may be on the verge of another tidal shift that once again works in favor of Alibaba stock. Urbanites are now moving back to more rural areas, taking jobs and discretionary incomes with them.

China’s Digital Economy 2.0

On balance, China’s biggest cities are still gaining workers at rural areas’ expense. The trend is abating though. Last year, seven million people shed their yuppie status to return to rural areas. Almost two-thirds of that group did so to work on China’s farms.

Things have changed dramatically, even if unevenly, on China’s pastoral landscapes. Though still rustic in some spots by most anyone’s standard, the government’s support via subsidies, the establishment of wireless telecom and internet service and the improvement of basic utilities are all improving the case for foregoing city life.

The so-called reverse migration also has an element that will feel familiar to U.S. investors and inhabitants as well, however. The new rural population is doing business in a way their parents wouldn’t have, and largely still can’t.

Case in point? Farmer Xu Pengfei and his business partner, an online-video celebrity of sorts who goes by the name Handsome, are promoting their produce grown in northern China’s Yujin village. The videos are filmed with an iPhone, selling fruits and vegetables to consumers nowhere near their farm. Government reports suggests that half of all the people leaving China’s cities are engaged in some sort of e-commerce, which transcends the physical limitations of distance.

It’s making a difference too, as these migrants are finding their incomes ultimately improve when they become rural entrepreneurs.

“[Returning migrants] have become a major driving force in closing the gap between Chinese cities and villages, and between the coast and inland,” explains Cui Chuanyi, with Beijing’s Development Research Centre of the State Council. Cui concludes “Much of China’s future growth lies in these less-developed regions,” jibing with a message Alibaba stock owners have been hearing for a while now.

Those wealthier entrepreneurs also make for stronger consumers, but most noteworthy is the fact that Handsome’s and Pengfei’s preferred platform for selling produce online is Taobao, owned by Alibaba.

Looking Ahead for Alibaba Stock

It’s not a reason in and of itself to step into BABA stock. It’s a secular shift that could take years to play out. Much could change in the meantime, and not all would-be entrepreneurs have found moving out of the city is a recipe for fortune. Indeed, urban populations are still growing, and rural populations continue to shrink.

On the other hand, even with a number of potential pitfalls still looming ahead for the e-commerce giant’s rural focus — like market saturation and logistical hurdles — there’s certainly argument to steer clear of Alibaba stock. As Barron’s confirmed on Sunday about the company’s rural ambitions, “Alibaba is growing fast there.”

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/urban-rural-china-alibaba-stock/.

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